Ask TheStreet: All About Warrants

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I often read about companies issuing warrants. What are they, and how do they affect a stock's price? Thanks, L.D.

Just to make it clear from the outset, warrants in the stock world bear no relation to those issued by high-plains sheriffs and hanging judges. So there is no need to worry about an outlaw CEO in our midst.

Put simply, a warrant is much like an option, in that it offers the holder the right, yet not the obligation, to purchase a set quantity of the underlying security at a certain price and time in the future.

The big difference between a warrant and an option is that warrants are issued by companies, whereas options are agreements between two third parties, neither of which are necessarily connected to the company.

In other words, if a warrant is exercised, then the issuing company is responsible for delivering the required shares of stock (or a commodity, index or currency). In an option transaction, it is the responsibility of the option holder to deliver the shares.

Warrants are certificates that are more often than not issued along with a bond or share of preferred stock. They generally trade independently of the security with which they are issued, meaning you can buy and sell them like stock.