What is a warrant in business finance?

A warrant in business finance refers to a security that grants the holder the right to purchase shares of a company’s stock at a specified price within a designated time frame. This feature makes warrants an attractive investment because they can provide significant leverage. If the stock price exceeds the exercise price stated in the warrant, the investor can buy the shares at a lower price, which could result in substantial gains.

Warrants are often issued alongside other securities, such as bonds or preferred stock, to sweeten the offer and attract investors. This type of instrument is particularly useful for companies looking to raise capital, as they give investors the potential for future participation in the company's equity. In contrast to options, which are often traded on exchanges and have expiration dates, warrants are usually issued by the company itself and can have longer expiration periods, enhancing their appeal.

Understanding warrants highlights their role in corporate finance and investment strategies, as they reflect both the potential for future growth and the risks associated with the underlying stock performance.