What Is a Share Warrant

1. What Is a Share Warrant? A share warrant is a financial instrument that gives the holder the right—but not the obligation—to purchase a company’s shares at a specific price before a certain expiration date. It functions similarly to a stock option, yet there are key differences in structure, issuance, and purpose. Share warrants are often used by companies as a means to raise capital, reward investors, or attract strategic partners. In essence, a share warrant represents a potential future ownership interest in a company. It does not immediately grant shareholder rights, but it provides an opportunity to acquire shares later, usually at a predetermined exercise price. Understanding the Basics of Share Warrants A share warrant is issued by the company itself, rather than traded among investors like regular shares. When a warrant is exercised, the company issues new shares to the holder, which increases the total number of outstanding shares. Because of this, warrants can cause dilution of existing shareholders’ equity if exercised in large volumes. The main components of a share warrant include: ● Exercise (Strike) Price: The price at which the holder can buy shares. ● Expiration Date: The final date by which the warrant must be exercised. ● Conversion Ratio: The number of shares each warrant can be converted into. For example, if a warrant allows the holder to buy one share at $5 before December 31, and the stock later trades at $10, the holder can exercise the warrant and buy at $5, effectively gaining a $5 profit per share. Types of Share Warrants There are several forms of share warrants, each designed for specific corporate or investment purposes: 1. Equity Warrants: These are issued by a company to raise funds or as part of a capital restructuring. When

2. exercised, they convert into newly issued shares. 2. Detachable Warrants: Issued together with bonds or preference shares, these can be separated and traded independently on the market. 3. Non-Detachable Warrants: These remain linked to the underlying security (such as a bond) and cannot be traded separately. 4. Call and Put Warrants: A call warrant allows the holder to buy shares, while a put warrant allows selling shares back to the issuer at a predetermined price. 5. Covered Warrants: Issued by financial institutions rather than the company itself, they are backed by underlying securities and traded in secondary markets. How Share Warrants Work The lifecycle of a share warrant typically involves issuance, trading, and exercise: 1. Issuance: A company issues warrants as part of a fundraising round, merger agreement, or employee incentive plan. These warrants often attract investors by offering future upside potential. 2. Trading: In some cases, warrants are listed on stock exchanges, allowing investors to trade them like other securities. The price of a warrant fluctuates based on the underlying share price, time remaining until expiration, and market volatility. 3. Exercise: When the share price exceeds the warrant’s exercise price, investors can exercise the warrant to buy shares at a discount. If the share price stays below the exercise price, the warrant may expire worthless. Benefits of Share Warrants

3. Share warrants provide advantages for both the issuing company and the investor: For Companies: ● Flexible Capital Raising: Warrants help raise funds without immediate dilution since shares are issued only when warrants are exercised. ● Investor Attraction: Warrants can make bond or equity offerings more attractive by adding potential upside. ● Strategic Incentives: They can be used to reward employees, investors, or business partners with long-term value participation. For Investors: ● Leverage Potential: A small investment in warrants can yield significant gains if the share price rises. ● Diversification: Investors can gain exposure to a company’s performance without buying full shares upfront. ● Defined Risk: The maximum loss is limited to the cost of the warrant. Risks Associated with Share Warrants Despite their benefits, share warrants carry inherent risks that investors must understand: ● Expiry Risk: Warrants have a fixed expiration date; if not exercised in time, they become worthless. ● Market Volatility: Warrant prices can fluctuate more dramatically than the underlying stock. ● Dilution Risk: Exercising large volumes of warrants can dilute existing shareholders’ value. ● Complex Valuation: Determining a fair price for a warrant involves multiple factors like volatility, interest rates, and time decay.

4. Difference Between Share Warrants and Share Options While share warrants and options may seem similar, they differ in origin and purpose: Aspect Share Warrant Share Option Issuer Issued by the company Often issued to employees or traded on exchanges Purpose Fundraising or investor incentives Employee compensation or speculative trading Outcome New shares are created upon exercise Shares are transferred from existing holdings Regulation Typically governed by company law Regulated under securities or derivatives law Real-World Example Suppose ABC Ltd. issues 1 million warrants with an exercise price of $10 per share, expiring in two years. If the stock price rises to $18 within that period, warrant holders can exercise them to buy shares at $10, realizing an $8 profit per share. ABC Ltd. receives $10 million in new capital, while the holders profit from their foresight. This mechanism benefits both parties—investors gain potential returns, and the company strengthens its capital base. Conclusion A share warrant is a dynamic financial tool bridging corporate finance and investment strategy. It offers companies a flexible way to raise capital and provides investors with leveraged exposure to potential stock gains. However, like all financial instruments, it requires careful analysis of risk, timing, and market conditions. Understanding share warrants is crucial for anyone involved in equity markets—whether as a company seeking growth or an investor aiming to capture opportunity. Knowledge and due diligence remain the keys to using this instrument effectively.