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In finance, a warrant is a security that entitles the holder to buy or sell stock, typically the stock of the issuing company, at a fixed price called the exercise price.
Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary, and have expiration dates. They differ mainly in that warrants are only issued by specific authorized institutions (typically the corporation on which the warrant is based), and in certain technical aspects of their trading and exercise.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bonds and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.
In the case of warrants issued with preferred stock, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so that the investor can earn dividends.
Warrants are actively traded in some financial markets, such as the German and Hong Kong stock exchanges.[1]