Option vs Warrant in Stock Market
Option and warrant are two terms common in the stock and derivatives market. They are traded throughout the world. People believe that stock options and warrants are the same because they have virtually the same leverage characteristics. They are very different instruments, however.
Stock options are contracts between two persons or institutions, one who owns a stock or willing to buy a stock and the other, a person who either wants to buy or sell those stocks at a specific price. In a nutshell, this transaction is between two investors that want to sell or buy stocks at a specific price that is usually determined by the stock market.
Stock warrants are contracts between investors and the financial institution who, on behalf of the company whose stocks are indicated, are issuing warrants. In a nutshell, it is between the investor and the company. If a company wants to give out stock warrants, they are either selling stocks or buying stocks FROM the investors. This is done to encourage the sale of their stocks as well as circumvent possible losses because of the reduction in value of the stock.
Difference between Option and Warrant in Stock Market
Stock option and stock warrant also differ with their exercise. Stock options can be issued with the clause to exercise anytime within the life of the option or only during its expiration. Stock warrants, on the other hand, are only exercised upon their expiration. Also with options, the company doesn’t profit from their exercise, it is only the winning investor. With warrants, it is the company that gets the direct effect of their exercise. Stock options also have stricter rules with regards to their issuance to level the playing field. Stock warrants are highly customizable and can be issued to suit the company’s present needs.
While stock options and stock warrants have the same trading characteristics, both are operate differently. If you want to dabble in these, it’s best to consult a professional first.
1. Stock options are contracts between two investors for the sale or purchase of stocks. Stock warrants are contracts between the company and the investors.
2. The company does not profit from a transaction involving stock options, but they do profit in transactions involving stock warrants.
3. Stock options have to follow a strict set of rules regarding their sale. Stock warrants’ terms are highly customizable.
4. Stock warrants are only exercisable at their expiration; stock options can be issued to be exercised anytime within their life, or only at their expiration.