Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Table of Contents
Stock warrants give the holder the right to buy or sell shares of stock at a set price on or by a set date directly from the public company that issues them, whereas stock options convey the right to buy or sell shares on or before a specific date at a specific price.
The chief difference between stock warrants and stock options is that warrants are issued directly by a company that’s typically seeking to raise capital. Options are derivative contracts that investors can trade to take advantage of price fluctuations in the underlying security.
Key Points
• Stock warrants allow investors to buy shares at a specified price on a set date, directly from the issuing company, while stock options are derivative contracts traded among investors.
• Companies typically issue stock warrants to raise capital, whereas stock options are created and traded by investors, which may allow for more flexibility in trading.
• Exercising a warrant results in the issuance of new shares, which can lead to dilution, while exercising options does not typically create new shares and is settled between traders.
• Both stock warrants and options provide speculative opportunities, but differ in terms of issuance, market trading, and potential dilution effects.
• Understanding the differences between stock warrants and options is important for investors, as each serves distinct purposes and carries unique risks and potential benefits.
What Are Stock Warrants?
A stock warrant is a contract that allows the holder the right to buy shares of stock at a future date at a predetermined price. The terms of the stock warrant typically allow the holder to purchase shares at a price that is often set above the stock’s price at the time of issue. Warrants generally have longer expiration periods than standard options, often lasting up to 10 years or more.
Companies issue stock warrants directly to investors. The companies set the terms of the warrant, including the stock’s purchase price and the final date by which the investor can exercise the warrant. Warrant holders do not have an obligation to buy the shares, but if they decide to do so they would exercise the warrants via their brokerage account.
Stock warrants are typically call warrants, which give the holder the right to purchase the shares at the predetermined price, as noted above. However, there are also put warrants, which give holders the right to sell shares at a predetermined date by the expiration date.
Public companies may issue stock warrants as a means of raising capital to fund new expansion projects. A company may also issue stock warrants to investors if it faces financial trouble and needs to raise funds to potentially avoid a bankruptcy filing.
In some cases, warrants are issued by financial institutions rather than the company itself. These are called “covered warrants” and may be cash-settled, meaning they do not result in new shares or dilution of existing shares.
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What Are Options?
An option is a contract that gives holders the right, but not the obligation, to buy (in the case of a call option or sell, in the case of a put option, an underlying security on or before a specified date at a specified price. As with stock warrants, option holders do not have to buy or sell the underlying shares, but they have the right to do so. If they do, they would exercise the options through their brokerage account.
Exercising options means you use your right to buy or sell the option’s underlying shares. If an investor chooses not to exercise the option, it expires worthless. (Note that the seller, or writer, of an options contract is obligated to fulfill the terms of the contract if it’s exercised.) Investors can trade some options on a public exchange alongside stocks and other securities.
Recommended: How to Trade Options: An In-Depth Guide
Similarities and Differences Between Warrants and Options
Warrants and options sound alike and at first glance, they seem to imply the same thing: the right to buy or sell shares of a particular stock. But there are also important differences between these two contracts that investors should be aware of.
Similarities
Warrants and options both offer investors an opportunity to benefit from movements in a stock’s price, though options can be traded without exercising while warrants typically require exercising to acquire shares.
With both warrants and options, the investor must exercise the contract to actually acquire shares. Both have specific guidelines with regard to the price at which investors can purchase (or sell, in the case of puts) their shares and the deadline for exercising them.
Warrants and options are both speculative in nature, since investors are essentially making a directional bet on which way the underlying asset’s price may move. Neither instrument provides voting rights or dividend payments prior to exercise. Investors can use different strategies when trading options or exercising warrants to potentially improve profitability while attempting to reduce losses.
Differences
Warrants and options also have important differences. While companies issue stock warrants, traders typically buy and sell options with each other directly. Warrants create new shares when exercised, which can result in dilution. Exchange-traded stock options generally do not create new shares, aside from employee stock options, which are basically a type of call option that, when exercised, can also dilute existing shares by increasing the total amount.
When investors exercise a warrant, they receive the stock directly from the company, while options are typically settled between traders.
đź’ˇ Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.
Stock Warrants vs Options: A Summary
Here’s a closer look at options vs. warrants.
| Stock Warrants | Stock Options |
|---|---|
| Confers the right to purchase (or sell) shares of stock at a specified price on or before a specified date. Holders of the contract have the right, but not the obligation, to exercise the contract. | Confers the right to buy (or sell) shares of stock at a specified price on or before a specified date. Holders of the contract have the right, but not the obligation, to exercise the contract. |
| Warrants create new shares, which may result in dilution. | Options do not create new shares, so there’s no dilution (unless they are employee stock options). |
| Issued by the company directly to investors. | Issued by traders or market makers who write call or put options. |
| Original issue warrants are not listed on exchanges, but there is a secondary market for the securities. | Options can be traded on public exchanges alongside other securities. |
| Primarily used to raise capital for the company. | Traders can buy (or write) options to try to benefit from price movements. |
| Warrant holders may have a decade or more in which to exercise their right to buy shares. | Options tend to be shorter-term in nature, with expiration periods usually lasting anywhere from a few days up to 18 months. |
| Less commonly used in the U.S. | Options are regularly traded on public exchanges in the U.S. |
Pros and Cons of Warrants
If you’re considering warrants versus options, it’s helpful to understand the advantages and disadvantages of each.
Stock warrants can offer both advantages and disadvantages to investors. Whether or not it makes sense to include stock warrants in a portfolio can depend on your individual goals, time horizon for investing and risk tolerance. Warrants are also considered geared instruments, meaning small moves in the underlying stock can produce amplified gains or losses. This leverage may increase risk.
| Stock Warrant Pros | Stock Warrant Cons |
|---|---|
| Warrant holders have the right to purchase (or sell) shares of stock, but are not required to do so. | Price volatility can diminish the value of stock warrants over time. |
| Stocks may be offered to investors at a premium relative to the current market price. | When warrants are exercised, new shares are issued, which may result in dilution. |
Pros and Cons of Options
As with stock warrants, trading options has both upsides and potential downsides. Beginning traders should have a thorough grasp of the essentials, prior to trading, to understand the complexities and risks involved. Here are some of the key points to know about trading options.
| Stock Option Pros | Stock Option Cons |
|---|---|
| Options may amplify gains compared to trading in individual shares of stock. | Stock options are more sensitive to volatility which can mean higher risk for investors. |
| May be suited to active day traders who are hoping to capitalize on short-term price movements. | Frequent options trades can mean paying more in commissions, detracting from overall returns. |
| Traders can use options as a hedging tool to manage risk in uncertain market environments. | Time value decays the value of options over time. |
The Takeaway
Understanding the difference between options and warrants matters if you’re considering either of these types of securities. While the language of stock warrants may sound similar to some of the terms used in options trading, these are in fact two different instruments.
Companies issue stock warrants primarily to raise capital, whereas traders typically buy and sell options with each other directly. Warrants create new shares of companies, while options do not typically cause any dilution.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
Is a warrant the same thing as an option?
No. Warrants and options are not the same thing. Companies issue stock warrants to give investors the right to buy shares of stock at a specified price on a specified date. Stock warrants may allow investors to purchase shares of stock at a premium, while providing a longer window in which to decide whether to exercise the warrant.
Options are derivatives contracts that give buyers the right, but not the obligation to buy (in the case of a call) or sell (in the case of a put) an asset at a specific price within a certain period of time.
Can warrants exist in a SPAC?
Yes. A Special Purpose Acquisition Company (SPAC) is typically created for the purpose of acquiring or merging with an existing company. This type of arrangement may enable private companies to circumvent the traditional IPO process. A SPAC may use warrants to raise capital from investors. These warrants are generally good for up to five years following the completion of a merger or acquisition.
Why would you buy stock warrants?
Stock warrants may appeal to some investors seeking speculative exposure at a lower upfront cost than purchasing shares outright. Warrants offer the right, but not the obligation, to buy stock at a set price in the future, and this can be attractive if the stock’s price rises. Warrants may expire worthless if the share price does not exceed the strike price, however. They are generally considered higher-risk instruments and are not commonly used in traditional portfolios.
Can I sell my stock warrants?
Some stock warrants are transferable, and may be sold on a secondary market. This depends on the issuing company and the terms of the warrant terms. Liquidity can vary: while exchange-listed warrants may be easier to sell, others may have limited or no market activity. It’s important to check the specific warrant agreement to understand whether the security is tradable and what restrictions might apply.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/Inside Creative House
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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