Characteristics of Warrants
As mentioned earlier, a warrant is a variant of a call option and gives the holder a certain right to purchase shares of the company at a predetermined price within a certain time limit. But a warrant is different from a call option in the following ways:
- Investors design call or put options whereas corporates issue warrants.
- Warrants have longer shelf life (5-10 years) whereas call or put options have much shorter life.
- Each warrant is different/unique in itself. But call or put options are standardized.
The above mentioned characteristics of warrants provide the opportunity to the investors to purchase them as they can be exercised at a later date in lieu of the shares of the company. The investors expect to receive these shares at a lower price than the market price. This speculative feature increases its investment attractiveness. Moreover, the secondary market of warrants itself adds to the investment opportunity of these instruments. Mostly, warrants are more traded in the secondary market than exercised with an objective of capital gain. Thus the in-built leverage feature existing in the warrants provides an opportunity to the investors to make large gains (also losses) in future.