All stock warrants are defined by their terms. The warrant will be “exercisable” for some defined period of “time” for predetermined “exercise terms”.
Exercising a warrant is very different from exercising a call option. When a call options is exercised stock is taken from someone who is short the call option and placed in your account. No money goes to the company whose option you exercise. This difference results in warrants having several small but important characteristics which make them unlike standard call options.
When you exercise a stock warrant the cash you provide as part of the exercise process goes directly to the company whose warrant you are exercising. For example, if the “exercise terms” (explained below) are “$5 plus one warrant is exercisable for 1 share of common stock”, then in exchange for the warrant you own and $5 the company will issue you one share of their common stock. The company is now $5 richer. (Logistically, you simply call your broker and instruct them to exercise the warrant. Assuming you have the cash in your account to cover the exercise price, this usually takes a few days to a week.)
Warrants are exercisable for a defined amount of time, usually 3-5 years. But, very importantly, unlike call options a warrant must have a current registration in place with the SEC in order to be exercisable. The company issuing the warrant must file this statement. If you own a warrant that you would like to exercise, and there is no registration statement in place, you can contact the issuer and ask that they file a registration statement.
These registration statements lapse after a certain amount of time. Practically, a warrant may have a current registration statement, allowing the exercise of the warrants, and when the registration lapses the issuer can no longer accept the warrants and issue stock. The result is a usually a decrease in the value of the warrants until a new registration is filed.
Finally, each warrant has exercise terms. These are as varied as the number of warrants trading and are the essence of understanding and profiting from warrant trading. These terms will be clearly defined in SEC filings made by the issuing company.
The most basic exercise term will simply provide a dollar amount and number of warrants required to receive a set amount of common stock. For example, “one warrant plus $5 will be exercisable for one share of common stock.” Send the company one warrant and $5, and a share of common stock will be transferred into your brokerage account.
More complicated terms will include:
- Issuance of a fractional number of common shares
- The requirement for a fractional number of warrants to receive shares
- A combination of several warrants with intertwined exercise terms (e.g. two class A warrants, plus one class B warrant, plus $4.25 may be exchanged for 1 share of common stock), and
- Issuance of some combination of common stock and another instrument (preferred stock, convertible stock, bonds) in exchange for a warrant plus some amount of cash
Whatever the warrant terms, it is essential to clearly understand the terms and verify that the warrants are currently exercisable if your trading strategy includes being able to exercise the warrants. Warrant terms must also be constantly monitored, as unlike listed option contracts, the issuing company can change the terms of the warrant. While this is unusual, it is not unheard of, and under certain circumstances can almost be expected.