Warrants are a little bit like a living memory of a long-past era of finance. Although relatively uncommon and out of favor in the United States, warrants have remained more popular in some areas of the world such as Hong Kong. However, they do still appear in the U.S. markets, and investors should know how to assess and value them. (For a background reading, see Warrants: A High-Return Investment Tool.)
In simple terms, a warrant is an option issued by a company that gives the holder the right to buy stock from the company at a specified price within a certain designated time period. Generally speaking, warrants are issued by the company whose stock underlies the warrant and when an investor exercises a warrant, he or she buys stock from the company and those proceeds are a source of capital for the firm.
Like an option, a warrant does not represent actual ownership in the stock of the company; it is simply the right (but not the obligation) to buy shares at a certain price in the future. Warrants typically have a much longer life than a call option - it is unusual for a warrant to be issued with less than a two-year term, and time periods of five to 10 years are not rare. In fact, some warrants are perpetual.
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