A warrant is a financial instrument that gives the holder the option, but not the obligation, to purchase a company’s stock at a specified price within a specific time frame. If the holder exercises the warrant, the company must issue new shares to the holder at the strike price in the warrant.
Exercising warrants has a dilutive effect on the existing shareholders because the number of outstanding shares increase while the company’s overall market cap remains the same. American warrants give the holder the right to exercise anytime on or before the expiration date, while a European warrant allows the holder to exercise only on the expiration date.
Warrants are very similar to stock options, but some significant differences exist. Options are not created or issued by the company, but are created by other investors. Options are actively traded on regulated exchanges, and generally have much shorter durations. Warrants often have expirations that exceed 10 years, while most options will expire within 1 year.