How to Trade Warrants

by Tina Amo

A warrant, like an option, is a derivative investment tool. Bearers have the right to purchase securities at a specified price and quantity in a certain period of time. However, the stock exchange does not issue warrants. Investors purchase warrants directly from the company issuing the underlying shares. A company can offer warrants while making an initial stock offering, to make the stocks more appealing to investors. The warrant could represent shares, an index, currency or commodities. The value of a warrant depends on the value of the underlying securities. It can provide high returns at low risk for investors who watch market movements carefully.

Types of Warrants

Investors can purchase a call warrant or a put warrant. A call warrant may be best known. It allows investors to purchase a number of stocks at a given price within a specified period of time. Conversely, a put warrant allows investors to sell back a specified number of shares to the issuing company at a given price within a stated period of time. Each type of warrant is designed to help investors trade the company’s stocks with more confidence. Investors can obtain stocks for less than the current value with call warrants or avoid a loss with put warrants.

Market Factors

Timing is an important aspect of investment. Investors can benefit greatly by making a trade in favorable conditions. It is possible to determine favorable opportunities by studying various market elements. For example, factors such as the issuing company’s current market performance and announcements can positively or negatively affect the value of a stock. This subsequently affects the value of the associated warrant.

Purchasing Warrants

Companies trade their warrants on the New York Stock Exchange. The investing process is similar to that used to execute a stock trade. Symbols for warrants are available in various locations, including newspapers and investment reporting websites. Investors may execute trades on their own, via trading portals online, or they may engage the services of a professional broker.

Exercising Warrants

Warrants are valid from two to five years. Investors holding an American warrant can purchase or put shares during the specified time period, up to the expiration date. This is unlike the European version, where investors must execute their warrants on the date of expiration.