-
Commitment to our readers
18 years
Helping you save money
Reviewed
by experts
Cited by
major publications
Finder maintains full editorial independence to ensure for our readers a fair assessment of the products, brands, and services we write about. That independence helps us maintain our reader's trust, which is what keeps you coming back to our site. We uphold a rigorous editorial process that ensures what we write and publish is fair, accurate, and trustworthy — and not influenced by how we make money.
We're committed to empowering our readers to make sound and often unfamiliar financial decisions.
We break down and digest information information about a topic, product, brand or service to help our readers find what they're looking for — whether that's saving money, getting better rewards or simply learning something new — and cover any questions you might not have even thought of yet. We do this by leading with empathy, leaning on plain and conversational language that speaks directly, without speaking down.
If the investor decides to buy the shares, they exercise the warrant. Until then, the investor doesn’t own any shares, can’t vote as a shareholder and can’t collect dividends from the company.
Fun fact: “American-style” warrants can be exercised anytime before the expiration date, while “European-style” warrants can only be exercised on the expiration date.
Stock warrant
A stock warrant allows the holder to buy shares of a company’s stock at a set price — a discount to the market price — before the expiration date. They are bought and sold through stock brokers, but not listed like stocks.
How stock warrants work
Suppose Company X wants to raise capital. It offers warrants to give investors the right to buy company shares at $10 per share within the next four years. Currently, the company’s shares trade at $7 per share.
If the investor believes the company will be worth more than $10 in the next four years, they buy the right to purchase 1,000 shares at $10 per share. To buy the warrant, the investor pays $0.50 per share, or $500 total for the 1,000 shares.
Four years later, Company X trades at $25 per share. The investor decides to exercise the warrant and buy the 1,000 shares at the agreed price of $10. The investor pays $10,000 to buy the shares for a total cost of $10,500 ($10,000 for the shares plus $500 to buy the warrants four years ago). The investor can now sell the shares at the market price of $25, or $25,000 total, and pocket $14,500 profit.
Alternative scenario: Four years later, Company X trades at $5 per share. The investor would not exercise the warrant and will only lose the initial $500 paid to buy the warrant. The investor could also sell the warrants to someone else before the expiration date.
Reasons companies issue stock warrants
Companies issue warrants to raise capital or make their bonds more attractive. Sometimes a bond may have a warrant attached to it, but it will pay less interest than a bond without a warrant. In this case, investors who want to earn more on interest and don’t want to buy the company shares can opt in to buy bonds without warrants.
By issuing warrants, the company profits in two main ways:
- Investors pay a fee to purchase warrants, which goes to the company as capital.
- When the investor exercises the warrant and buys shares, the company gets the money by selling the shares to the investor.
4 types of warrants
There are four types of warrants that slightly differ in one aspect: whether you have to buy bonds or preferred stock along with the warrants.
Warrant type | Definition |
---|---|
Traditional | This type of warrant is offered as a detached part of a bond or preferred stock. The investor can “detach” the warrant and sell it individually while keeping the bonds or preferred stock. |
Wedded | Wedded warrants are attached to a bond. You can’t “detach” the warrant and sell it individually; you have to sell both. |
Covered | Covered warrants are those bought by a financial institution from the issuing company. The financial institution can then sell the warrants to investors. |
Naked | The most basic type of warrant without any attachments like bonds or preferred stock deals. |
Call warrants vs. put warrants
You can buy two types of warrants: call warrants and put warrants.
- Call warrants give you the right — but not the obligation — to buy the company stock at a particular price within a set time frame.
- Put warrants give you the right — but not the obligation — to sell the company stock at a particular price within a set time frame.
Stock warrants vs. stock options
Stock warrants are similar to stock options in the sense that they both give you the right but not the obligation to buy or sell shares of stock. But there are differences.
Stock warrants | Stock options |
---|---|
Issued by the company over the counter | Traded between investors on an exchange |
New shares are issued and can cause dilution if warrants are exercised | Existing shares are traded and there is no dilution |
Used for companies to raise capital | Doesn’t affect the company |
Expiry date up to 15 years in the future | Typically last for a few months |
Taxes on stock warrants
Stock warrants are considered taxable income at the amount of the difference between the exercise price and the price of a share when you exercise the warrant, minus the cost basis. Here’s an example:
- You exercise warrants at $10 per share to buy 1,000 shares.
- You paid $500 for the warrants.
- Your total cost is $10,500 when you exercise your warrants — $500 to buy the warrants plus $10,000 to buy 1,000 shares at $10 per share.
- Suppose the market price on the day of exercise is $25. Your shares are worth $25,000.
- The difference between the cost to buy the warrants and the shares at the agreed price ($10,500) and the price of shares when you exercised your warrants ($25,000) is $14,500.
- This $14,500 is taxable as ordinary income in the year of exercise. This isn’t considered a capital gain because you didn’t own shares until you exercised your warrants.
Capital gains and losses
You have two options:
- Sell the shares you bought by exercising the warrants right away.
- Hold the stock.
If you hold the stock, the exercise price becomes your cost basis. Gains or losses from that price onward are considered a capital gain or loss. Shares you hold for more than a year after exercise is considered a long-term gain or loss.
Stock warrant pros and cons
Buying stock warrants can be useful, but there are drawbacks to consider.
Pros
- Can earn a profit if the company has strong growth potential
- Relatively low entry bar.
- You don’t have to purchase shares if the exercise price is higher than the current market price
Cons
- You don’t own any shares, only the right to buy them
- You may find it hard to sell your put warrants if the company goes bankrupt
- You can only purchase warrants over the counter, not on an exchange
Compare trading platforms
What is the Finder Score?
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on nine different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
Bottom line
Stock warrants can be a decent investment option if you believe in the company that offers them. This can give you the option to purchase shares at a lower price than what it could trade in the future. But be sure to do your research to determine whether they’re right for you. Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money. Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Ask a question
More guides on Finder
-
Best Paper Trading Apps to Practice Trading With Fake Money in 2025
Some of the best paper trading apps to practice stock trading with fake money include Interactive Brokers, eToro, Charles Schwab and more.
-
Best Stocks for Beginners With Little Money to Invest
These are the stocks to buy when you don’t have much to spend.
-
Trading for Beginners: 9 Best Trading Platforms to Get Started
These are the best trading platforms for beginners, according to Finder’s comprehensive analysis.
-
5 Best International Stock Brokers to Invest in Foreign Assets
Want to buy and sell international stocks? Here are the top brokers to help you trade global markets.
-
9 Best Discount Brokers of 2025 for Low-Cost Trading
These are the best discount brokers of 2025 according to Finder’s comprehensive review.
-
5 best stock picking services of 2025
Compare the 5 best stock picking services, according to Finder’s analysis, and learn how to choose the best option for your needs.
-
10 Best Stock Apps of 2025 to Elevate Your Mobile Trading
Check out our picks of the best trading apps for beginners, options traders, hands-off investors and more.
-
5 Top Graphene Stocks to Invest in Today
We’ve rounded up stats on some of the most popular graphene stocks, along with information on how they compare and how to invest.
-
10 Best Brokerage Accounts for Trading and Investing in 2025
See our picks of the best brokerage accounts, including Fidelity, SoFi, Charles Schwab, Public, Robinhood and E*TRADE .
-
5 best ETFs for 2025
Check out the best-performing ETFs so far in 2025.