Warrant

A warrant is a security issued by a company that gives the holder the right, but not the obligation, to buy (or in some cases sell) the company's stock at a set price before a set expiration date. That set price is called the exercise price or strike price. If the stock is trading above the strike price when the warrant is exercised, the holder can buy shares cheaper than the market price; if not, the warrant can simply be left to expire worthless.

Warrants work a lot like call options, which give a similar right to buy stock at a fixed price. The key mechanical difference is where the shares come from. When someone exercises a stock option, they receive shares that already exist, traded between two market participants. When someone exercises a warrant, the company issues brand new shares to fulfill it. That makes warrants dilutive: exercising them increases the total number of shares outstanding, which slightly reduces the ownership percentage and earnings-per-share of everyone who already holds the stock.

Warrants are usually issued directly by the company itself, often attached to a bond or preferred stock offering as a sweetener, or handed out to early investors in a SPAC (a shell company that merges with a private business to take it public) or a small-cap financing deal. Options, by contrast, are created by exchanges or traded independently of the company and involve no dilution. Warrants also tend to run much longer, often several years from issue to expiration, whereas listed options typically expire in weeks or months.

The nuance that trips people up is timing style and liquidity, not just the dilution point. An American-style warrant can be exercised any time up to expiration, while a European-style warrant can only be exercised on the expiration date itself. Many warrants, especially ones attached to SPAC deals, trade on exchanges under their own ticker with much thinner volume than the underlying stock, so their quoted price can be volatile or have a wide gap between the buy and sell price even when the stock itself is calm.