what is stock warrant

**Quick answer:** A stock warrant is a long-dated contract, issued by the *company itself*, that gives the holder the **right—but not the obligation—to buy a fresh share of the company at a pre-set “exercise” price before the warrant expires**. When that right is exercised, the company issues *new* shares, so existing shareholders are diluted. --- ## 1. How a warrant works | Feature | Warrant | Standard call option | |---------|---------|----------------------| | Issuer | **The company** (or its SPAC sponsor) | An exchange or OTC market maker | | Underlying share source | *New* shares created at exercise (dilutive) | Already-outstanding shares (no new dilution) | | Typical maturity | 3–7 years (SPACs: 5 yrs) | Usually < 2 years | | Trading venue | Often listed and tradeable like a stock (ticker ends “-W” or “WS”) | Listed option exchanges (e.g., CBOE) | | Accounting impact | Fair-value mark-to-market can add GAAP gains/losses each quarter | No corporate P&L effect | --- ## 2. Why companies issue warrants 🏗️ 1. **Sweetener for capital raises** • Venture lenders, PIPE investors, or bondholders accept a lower coupon if they also receive warrants. 2. **SPAC deals** • Sponsors distribute warrants to early investors as part of the SPAC unit. 3. **Strategic partnerships** • A supplier or reinsurer may take warrants in lieu of cash, aligning long-term interests. --- ## 3. How warrants affect existing shareholders 📉 1. **Dilution math** • When a warrant is “in the money” (stock price > strike), exercise adds shares to the float, reducing everyone’s percentage ownership. 2. **Headline earnings noise** • If the warrant is classified as a liability, its fair-value swing goes through GAAP earnings each quarter—making EPS look volatile. 3. **Dealer hedging pressure** • Institutions that write the warrant often delta-hedge by shorting the stock, which can weigh on the share price until the position is unwound. --- ## 4. Reading a warrant term sheet 1. Strike price relative to today’s stock price? 2. Expiration date and any *accelerated* redemption clauses? 3. Cash vs. cashless exercise mechanics? 4. Anti-dilution or reset provisions that might lower the strike in future? 5. Maximum shares that could be created if *all* warrants are exercised (check the “fully diluted” share count). --- ## 5. Quick example • **ROOT 2025 warrants**: Strike $45, expire Nov-2030. – Stock at $90 → warrants deep in-the-money. – 5 million warrants × $45 = $225 M cash inflow to ROOT *but* ~5 % dilution to existing holders. – As the stock moves, quarterly mark-to-market swings show up in ROOT’s GAAP P&L, creating noisy headline numbers—one reason the shares gapped down this summer. --- ### Bottom line 💡 Think of a warrant as a *company-issued, long-life call option* that raises capital if exercised but can dilute and distort earnings along the way. Always check the strike, share count, and accounting treatment before deciding whether the sweetener is worth the sugar. --- **Curious to share?** Are you mainly hunting short-term pops like ROOT’s post-warrant volatility, or is your bigger goal steady long-term compounding? 🎯