Companies issues warrants to raise capital or capital preservation.
Warrants raises capital when warrants holders convert their warrants into a main stock by paying an exercise price. Warrants are a form of capital preservation issued to (1)share holders instead of dividends, (2) compensation CEOs, companies employees as substitution to cash, (3) compensation to investment banks for their underwriting and other banking services.
What are warrants ?
Its a financial tool that allows the holder to convert it into a main stock by paying a exercise price by the expiry date. The holder has a right but not an obligation to convert the warrant into the main stock. The warrant can be traded in the stock exchange. The price of warrant is usually lower than the current stock prices.
Two sides of the coin
Cons :Warrant has an expiry and its does not gives dividends and it dilutes the main stocks.
Pros:
1. Right to buy shares at the exercise price so if the price by the warrant holder is not attractive, the holder can choose not to convert it
2. Its only a portion of the stock price (low cost)
3. Its has a relative higher profit % as compared to purchasing the main stock
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