Stock Option vs Stock Warrant: Key Differences Explained

Stock options and stock warrants both give investors the right to purchase a company’s shares at a predetermined price, but they operate differently. While options are widely traded on public exchanges or granted as part of employee compensation, warrants are issued directly by the company—often as part of fundraising strategies.

This guide explains the key differences, use cases, and implications of each instrument to help investors and professionals understand when and why they are used.

A stock option is a financial contract that gives the holder the right—but not the obligation—to buy (call) or sell (put) a specific number of shares at a pre-agreed price (strike price) within a set period (until expiry). These contracts are commonly used in the stock market for speculation and hedging, and are often offered as part of employee compensation.

There are two main types:

• Employee Stock Options (ESOs): Typically granted to employees as part of remuneration, often with vesting periods and conditions.
  

• Exchange-Traded Options: Standardised contracts bought and sold on regulated exchanges, accessible to all investors.
  

Exercising options does not involve issuing new shares, so existing ownership is not diluted. They are purely contractual agreements between two parties and are widely used due to their flexibility.

A stock warrant is a security issued directly by a company that gives the holder the right to purchase the company’s stock at a specific price (exercise price) before a set expiration date. Companies issue warrants to raise capital, as a form of compensation, or to incentivize investors, often attaching them to bonds or preferred stock.Unlike options, warrants are created by the company and typically used as part of fundraising or investment incentives.

Key characteristics include:

• Dilution: New shares are issued when warrants are exercised, increasing the total share count.
  

• Longer Duration: Warrants can have longer lifespans—often several years, compared to months for options.
  

• Types of Warrants:
  

  • American-style: Can be exercised anytime before expiration.
    

  • European-style: Can only be exercised on the expiry date.
    

Warrants are often attached to bonds or preferred shares as “sweeteners” in capital-raising efforts. They may trade over the counter but are usually less liquid than stock options.

Imagine an employee receives 1,000 call options at a strike price of ₹500. If the company’s stock price rises to ₹700 before the expiry date, the employee can buy at ₹500 and profit ₹200 per share.

A company issues bonds with attached warrants that allow investors to purchase stock at ₹100. If the stock rises to ₹150, investors can convert their warrants, benefiting from the upside — while the company raises capital through new share issuance.

Here’s what happens when a stock warrant expires:

• If the market price is below the exercise price, the warrant expires worthless.
  

• No dilution or share issuance occurs post-expiry.
  

• The investor loses any premium paid.
  

• American warrants: Can be exercised anytime before expiry.
  

• European warrants: Can only be exercised on the expiry date.

Stock warrants are often issued in specific financial arrangements to enhance investment appeal or compensate stakeholders. Common implementations include:

• Attached to convertible bonds or preferred shares
  

• Used in venture capital deals
  

• Offered to advisors or lenders
  

• Sometimes issued as detachable warrants, tradable separately

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.