What Is a Stock Warrant, and How Do They Work?

A stock warrant is a type of derivative that gives the holder the right to buy a share of a company for a specific price, within a set window of time or on a specific date. Companies often issue stock warrants to raise capital, or as an employee benefits, recruitment or retention package. While a stock warrant is in many respects similar to a stock option, there are some key differences in what they do, who can get them and how they’re taxed. Let’s break down the ins and outs of stock warrants, as well as how you might benefit from them.

A financial advisor can help you decide when to act on a stock warrant and other investment moves for your financial plan.

What Are Stock Warrants?

A stock warrant is a legal agreement between a company and an individual, granting the individual the right to buy or sell the company’s shares at a specified price within a set time frame. The agreed price is called the “strike price,” and the set time frame ends on the “expiration date.”

There are different types of stock warrants, all considered alternative investments. A call warrant allows the holder to purchase shares at the strike price, while a put (or sell) warrant enables the holder to sell shares at that price. While you aren’t obligated to make these transactions, you have the option to do so.

The stock warrant remains valid until its expiration date. After that date, the warrant expires, and the holder can no longer use it. With an American-style warrant, the holder can exercise their right to buy or sell at any point before the expiration date. In contrast, a European-style warrant can only be exercised on the expiration date. Both types of warrants are legally recognized in American and European markets.

Why Are Stock Warrants Issued?

Companies issue stock warrants primarily as a way to raise capital or make financing deals more attractive. By attaching warrants to bonds or preferred shares, a company can offer investors additional upside potential without immediately issuing common stock. This can help lower borrowing costs or improve demand for a new security. For growing or cash-constrained companies, warrants can be a flexible financing tool.

Stock warrants are also used as incentives in strategic transactions, such as mergers, acquisitions or private placements. They can reward early investors or partners if the company performs well in the future. From the company’s perspective, warrants align investor interests with long-term share price growth. While they may lead to dilution if exercised, that dilution is often paired with new capital coming into the business.

In times of financial distress, warrants have also been used to help rescue companies. During the 2008-2009 financial crisis, several banks issued warrants as part of the Troubled Asset Relief Program (TARP). For example, some Bank of America warrants allowed investors to purchase shares at $13.30 by January 16, 2019. By that time, the value of the shares had nearly doubled, offering investors significant returns.

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Examples of a Stock Warrant

As an example, let’s say that XYZ Corp. wants to issue a series of stock warrants to new hires. It could structure its warrants as follows:

American-style call warrant for 1,000 shares of XYZ Corp. stock (the asset) at $50 (the strike price) within five years (the expiration date).

This stock warrant gives the holder the right, but not the obligation, to buy up to 1,000 shares of XYZ shares from the company for $50 per share. Even if the stock is selling for $80 per share, the holder can still buy it at $50 per share. The higher the stock’s price rises, the more valuable this warrant becomes. The holder can exercise this right at any time within the five years. After that, the warrant expires and is useless.

Let’s look at another example:

European-style put warrant for 1,000 shares of XYZ Corp. stock (the asset) at $75 (the strike price) on July 1.

This stock warrant is a little bit different. It gives the holder the right, but not the obligation, to sell up to 1,000 shares of XYZ Corp. shares back to the corporation for $75 per share. If the stock is only worth $30, the company still has to buy it from the holder for $75 per share. The lower the stock falls, the more valuable this warrant becomes. Since this is a European-style warrant, the holder can only exercise it on July 1. Before that date it has not yet matured, while afterwards it has expired.

Companies relatively rarely issue put warrants, because to do so would be to bet against their own stock. This raises numerous legal, ethical and cultural issues that must be navigated during any put warrant issuance.

When a company sells stock warrants, it will also issue the warrant with a price set per share. Let’s say a stock warrant is for 1,000 shares of stock. If it’s sold at $5, this means that the price for the warrant is $5 per share, or $5,000.

Stock Warrants vs. Stock Options

An investor reviews stock warrants and how they work.

Stock warrants and stock options are often confused because they both give investors the right to buy shares at a set price. While they function similarly on the surface, they differ in important ways that affect risk, timing and who issues them. Understanding these distinctions can help investors better evaluate how each fits into a broader strategy.

Who Issues Them: Stock warrants are issued directly by the company itself, often as part of a capital-raising effort. When exercised, they result in new shares being created, which can dilute existing shareholders. Stock options, by contrast, are typically issued by an exchange or granted by employers as compensation and do not usually create new shares when exercised.
Length of Time Until Expiration: Warrants generally have much longer lifespans, sometimes lasting several years. This gives investors more time for the underlying stock price to rise above the exercise price. Stock options tend to have shorter expiration periods, which makes timing more critical.
Impact on the Company: When a warrant is exercised, the company receives cash from the investor and issues new shares. This can strengthen the company’s balance sheet but also increases the total number of outstanding shares. Stock options usually involve existing shares and don’t provide direct capital to the company.
Where They Trade: Stock warrants may trade on exchanges or over the counter, depending on how they’re structured. Stock options are standardized contracts that trade on regulated options exchanges. This standardization generally makes options easier to price and trade, while warrants can be more complex.

In short, both stock warrants and stock options offer leveraged exposure to a company’s stock, but they serve different purposes. Warrants are often tied to corporate financing and long-term growth, while options are more commonly used for trading or compensation. Knowing how they differ can help investors choose the instrument that best matches their goals and risk tolerance.

Taxes on Stock Warrants

Tax treatment is another difference between stock options and stock warrants. Stock options, in an employee compensation context, can be eligible for preferential tax treatment. But stock warrants don’t enjoy the same breaks. Exercising stock warrants results in taxable income that amounts to the difference between the strike price and the price of a share, minus the cost basis.

For example, say you exercise warrants with a strike price of $20 per share to buy 100 shares of XYZ Corp. You originally paid $400 for the warrants, so your total investment is $2,400. If the market price on the day of exercise is $40, the shares are worth $4,000. That’s a difference of $1,600. That amount is deemed to be ordinary income, not a capital gain, since you didn’t own the stock before exercising the warrants. It’s a good idea to consult a tax expert to make sure you understand and follow relevant tax rules.

Bottom Line

Stock warrants have many characteristics in common with stock options, but the two have some key differences.

Stock warrants are specialized investment instruments that give investors the right to buy a company’s shares at a set price within a defined time period. Companies use them to raise capital or enhance financing deals, while investors may see them as a way to gain leveraged exposure to potential stock price growth. Compared with stock options, warrants tend to last longer and are issued directly by the company, which can lead to dilution when exercised.

Investing Tips

Whether you trade in warrants, options, equities or bonds, financial advice can make all the difference. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Given the relative complexity of how stock warrants are taxed, a free tax calculator can get you in the ball park of what is owed. Also, if you’re especially focused on lowering your tax liability, here is a helpful guide to assist you in achieving that goal.