Warrant certificates are issued by companies themselves for investors to buy securities (or equity) at a certain price. Warrant certificates are similar to options, but should not be confused with them, as options are issued by exchanges, not companies themselves.
Before you get too excited and think that Apple or Tesla will personally call you and offer you a warrant certificate, just know that they won’t—warrant certificates are tied in with small-cap companies, not the big-cap companies.
Warrant certificate investors receive securities—the term for any stocks, bonds, mutual funds, or ETFs—in the form of equity for the company. 99% of the time, warrant certificates are tied to financings—you are unable to receive a warrant certificate without a financing or a common share.
Warrant certificates offer both pros and cons. While they are risky investments—pretty much a high-stakes poker game, as you may not know the outcome of the company that they now have equity in—they have the potential to offer a great return on investment due to their low price point.
Types of Warrant Certificates
There are two types of warrant certificates that can be offered by companies.
- Put Warrant: Put Warrants state the amount of equity purchased by an investor that can be sold back to the company purchased from for a certain price by a specific date—AKA you’re making money.
- Call Warrant: A Call Warrant refers to the exact number of shares of equity that can be purchased from the company (or issuer) at a certain price by a specific date—AKA you’re giving your money away and hoping for the best.
Essentially, the difference between a Put Warrant and a Call Warrant is one is being sold back to the issuer by the purchase and the other is being sold by the issuer to the purchaser.
Benefits of Warrant Certificates
As mentioned above, warrant certificates are high-risk buying options. Many small-cap companies offer warrant certificates as a way for the company to raise capital. While these certificates are high-risk, they also offer benefits and the ability for you to make money moves.
- Warrant certificates give you the opportunity for a high return on investment. Most warrant certificates are offered at a discounted rate, therefore they have the ability to give you a higher return if the company invested in grows successfully.
- Unlike common stock options, where you can lose more than you invest, the most money that you can lose on a warrant certificate is the exact amount that you spend. For example, if you purchase a $100 warrant certificate and the company you invested in goes bankrupt, the max you will lose is $100.
- You have the ability to sell your warrant certificates, otherwise known as a Put Warrant certificate.
- Down the road, you have the ability to buy more warrant certificates for a specific price down the road. However, there is a timeline in which you can buy additional certificates—typically 2, 3, or 5 years.
Important Things You Should Know
Before investing in or purchasing a warrant certificate, you should be aware of the cons of warrant certificates and the important things to know.
- You should not trade in your warrant certificates if the stock prices of the company you invested in are down. If you trade in your certificates during a time where stock prices are down, you can lose significant money.
- Warrant certificates have an expiration date. If the certificate expires, the warrant is essentially worthless if not sold before the expiry date.
- Warrant certificates are usually issued for small-cap companies and newer companies as their purpose is to generate capital. That being said, if the company goes bankrupt or is unable to financially support itself, you are at risk of losing money.
What to Look For to Make Money
The idea here is to make money. Purchasing a warrant certificate that is not discounted will limit your chances of making the most money possible from this type of investment. As a retail investor, being aware of the costs and discounts associated with warrant certificates will help ensure that you’re making more than you paid. Keep in mind, warrant certificates are high risk yet high reward—shoot for the stars, aim for the reward.
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