What Is a Redeemable Stock Warrant?

by Luke Arthur ; Updated July 27, 2017

Owning stock in a company can provide you with an opportunity to realize appreciation from the increases in value of a company. One way that you can benefit from the appreciation in a company without actually owning its stock is through a redeemable stock warrant. With this type of security, you are entitled to shares of the stock in the future.

Redeemable Stock Warrant

Stock warrants are items that are issued directly by the company that issues its stock. These items allow investors to have the right to buy a certain number of shares of stock at fixed price in the future. Warrants are typically offered to investors in a new company as a way to increase their investment in the future without investing much more money. This can be used as an incentive to attract new investors into a company. Then at some point in the future, the warrant holder can redeem it for extra shares of stock in the company.

Compared to Options

Redeemable stock warrants are very similar to options in that they can provide investors a way to get additional shares of stock in the future; there are a few key differences between stock warrants and options, however. The most noticeable difference is that stock warrants are created by the company directly. Options are created in the stock market and are not produced directly from the company. They both give the holder the right, but not the obligation, to buy additional shares of stock in the future.

Where Shares Come From

When an individual decides to redeem a stock warrant, he takes it to the company that issues the stock. At that point, the company creates additional shares of stock to give to the investor. Instead of going out into the secondary market and buying shares from other investors, the company simply makes more shares. This can actually work against investors because it increases the number of shares in the market place and dilutes the value of each outstanding share.

Trading Warrants

Although warrants are originally issued by the company to an investor directly, you do not have to get a warrant straight from the company. These items can be traded on the secondary market and can be used to your advantage as an investor. Warrants can trade at less than the face value of the stock. By timing your purchase correctly, you could make a substantial profit from buying warrants. After purchasing, you can redeem the warrant for shares below market price and then sell them for full price.

About the Author

Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.