Why Do Companies Issue Warrants?

by Jeffrey Joyner

Companies issue warrants to raise money to meet a variety of needs, from expanding operations to funding a settlement. Although they could sell stock, the number of shares any company may issue is subject to regulation by the Securities and Exchange Commission. Like options, warrants give the buyer the right to buy stock, but the purchaser is under no obligation to do so. Warrants are among the easiest investment instruments that a company may offer and a buyer may purchase.

Limited Issue

If a company wants to offer options, the possible number of contracts in each series of options is virtually unlimited. Each series of warrants, on the other hand, represents a specific number of warrants to be issued, allowing the company to determine at the outset how many might be sold. Because of the limits on how many warrants are available, the price for the most desirable series can be higher, and that is beneficial to the company.

Flexibility

Warrants are exempt from guidelines regarding exercise price and date of maturity, and they do not have to meet any rules regarding the size of the contracts. This means that companies may issue a series of warrants whenever investor demand is sufficient. Each series may have different conditions and prices, allowing companies to promote a new, more favorable warrant over a previous series that is no longer appealing to investors.

Potentially Attractive to Small Investor

Investors may purchase warrants for a fraction of the cost of the stock. During the lifetime of the warrant, if the stock price increases, the investor may buy the stock at the point that maximizes his profit. The most the investor stands to lose is the amount paid for the premium. The low cost and low level of risk make warrants attractive to investors who are willing to risk only a limited amount of cash.

Warrant Owners Are Not Stockholders

If you purchase warrants, you are purchasing the right to buy stock at a later date. Until you exercise that right, you do not own stock. This means that you are not eligible for dividends and you have no shareholder voting rights. The duration for a warrant series is typically several years, throughout which the company has the use of money paid for the premium without significant liability for unexercised warrants.

About the Author

Jeffrey Joyner has had numerous articles published on the Internet covering a wide range of topics. He studied electrical engineering after a tour of duty in the military, then became a freelance computer programmer for several years before settling on a career as a writer.

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