A warrant is a transferable contract that gives the holder the right, but not the obligation, to buy or sell a specified quantity of a given asset at a predetermined price on the final date stipulated in the contract.
Warrants are derivatives and as such are financial instruments classified as securities (bonds, equities). In fact, they belong to a medium (the main characteristic of derivatives) also called underlying, which may be in the form of a stock, bond, commodity, currency, etc..
Unlike exchange traded options (OTC options), warrants are also suitable for distribution at the retail market, because they can be traded in smaller batches. Buy and sell orders for warrants can just like stocks be charged in an order system by specifying the WKN. An access to a futures exchange is not required.
Warrants issued with preferred stocks, entail the technicality of stockowners having to detach and trade the warrant prior to receiving dividend payments. Therefore, in some cases it is advantageous to detach and sell quickly, in order to earn dividends.
Warrants are issued in several ways which include first warrants that can be a part of convertible notes (traditional warrant). Principally, warrants usually refer to shares of the company that issued the bond. Such warrants are also in the context of a capital increase, and the duration can be up to ten years.
Secondly, they can be published independently as a so-called naked warrant, which generally have maturities of up to two years, and are issued in the same class as retail market warrants.
A special form of naked warrant is the covered warrant, the writer of the underlying asset usually stocks, and serves the warrant in case of exercise. Warrants which are not hedged with the underlying security, but other options or futures, are not described as covered warrants.
Their differences with options is that warrants are issued directly by credit institutions or investment firms. The issuer is typically committed to continually offer a return to investors wishing to buy or sell warrants. And the number of warrants offered by the issuer is limited. Therefore, the selling side of the markets, may disappear when all the warrants are subscribed by investors. In this situation, the warrant reads “bid only”.
The deadline for resale depends on the choice made by the issuer of the warrant. Unlike options, it is not possible to sell short a warrant, this limits the option strategies and the risk to the buyer so much that the maximum possible loss is limited to the premium paid. And the style of the warrants is overwhelmingly European.