Stock options are benefits provided to the employees in an option of buying shares in the company at a discount or a stated fixed price.
The employee stock option is a label that refers to a compensation contract and has some characteristics of financial options. It gives the investor the right but not an obligation to buy or sell a stock at an agreed upon price and date.
A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date. Most stock warrants provide the investor the right but not an obligation to buy shares of the company at a specified price before the warrant expires. They are the companies that raise capital since the company is limited to the number of shares it can issue so the companies issue warrants instead to balance out.
What is the difference between Stock warrants and stock options?
The first and foremost difference between stock warrants and stock options is how they originate. Stock options are listed on exchanges while stock warrants are issued by the company itself. When a stock option is exercised the shares are exchanged from one investor to another but in the case of stock warrants the stocks are not received from the investor but the company itself. Stock options do not allow the company to make money for itself when exchange that’s why stock warrants are issued because they help the company to raise capital through equity. It allows investors to own shares of a company at a lower price than that of a stock option.
The stock warrants last for long terms that are up to 15 years, while stock options are short-termed usually a month or at the most 2-3 years. That is why stock warrants become a better investment option for longer terms than stock options.
Unlike stock options, new shares are issued by the company when the stock warrant is created. Warrants are created based on the issuer of the warrant and is always fluctuated in such a way that it meets the interest of the issuer whereas there is no such variable is seen in stock options, because they are one one-sided option gives you the right to purchase an existing share of a company’s stock at a specific price, whereas warrant offers the right to buy a share that will be created in future.
Another specific difference is the pricing model; both warrants and options have different pricing strategies. The model for pricing a warrant is a customized version of the model used for pricing an option. It makes use of both dilution and gearing, representing their leverage offered by the warrant and it’s directly or proportional to its gearing. Other than a warrant cannot be exercised unless you have registered it with the SEC while an option doesn’t require a registration for the exempt. The option contracts are standardized and comply with specific rules by exchanges, while warrants are more flexible; as a result of this different warrants have different maturity times, exercise prices, contract sizes and parities.