A warrant is a derivative security issued directly by a corporation that grants the holder the right (but not the obligation) to purchase the company's stock at a specified exercise (strike) price for a defined period — typically several years to perpetuity, far longer than exchange-traded options. Warrants are often attached to bond or preferred stock offerings as a "sweetener" to make the offering more attractive to investors, then may trade separately in the secondary market.
Like options, warrants have intrinsic value (current stock price minus exercise price, if positive) and time value. Warrants are in the money when the stock price exceeds the exercise price. When a warrant is exercised, the company issues new shares, which is dilutive to existing shareholders — this distinguishes warrants from call options (which involve existing shares already in the market).
The dilution effect is important: exercise of a large warrant issue can significantly increase the share count, reducing earnings per share and potentially depressing the stock price. This dilution must be accounted for in fully diluted EPS calculations.
Warrants offer leverage: a small move in the stock price produces a proportionally larger move in the warrant's value. This makes them attractive for speculation but also increases risk significantly.
> Exam tip: On the Series 7 and Series 65, know that warrants are issued by the company (unlike exchange-traded options, which are issued by the OCC) and result in new share issuance when exercised. This creates dilution. Warrants typically have much longer lifespans than listed options (months vs. years/perpetual). Remember that detachable warrants can trade separately from the bonds they were issued with.