Stock Warrant vs Stock Option
There has been a lot of debate regarding stock warrants vs. stock options, and what makes them different and the advantages of each.
There has been a lot of debate about stock warrant vs stock option, and for good reason. Some people argue that the former is better while others defend the latter. When it comes to equity compensation, knowing stock option and stock warrant differences is essential, as it will help you communicate with various investors effectively.
Employee ownership is arguably the best way to help the company’s staff grow by engaging with them. The situation benefits all parties. Therefore, when it comes to stock option and warrant differences, knowing their ins and outs could do you a massive favor.
Stock Warrants vs. Stock Options
There has been a lot of debate regarding stock warrants vs. stock options, and what makes them different and the advantages of each. Let us discuss both of them to see what makes them different and which one is better.
What is a Stock Warrant?
Stock warrants are quite similar to stock options in the sense that they provide employees the freedom of buying or selling stock for set prices on specific dates. Stock warrants stand out from other options because they don’t originate on the stock exchange. Instead, companies issue them. Whenever someone exercises a warrant, the company directly gives the stock to the employee.
They will also get a warrant certificate, including its terms and the details pertaining to when you can exercise them and when they will expire. Also, it is worth noting that warrant certificates are not ownership. Instead, they essentially provide you the right to buy company stock at specified prices.
What is a Stock Option?
Stock options provided by employers offer you the opportunity to purchase a particular amount of shares from your organization’s stock at a price and time specified by your employer. Publicly and privately held companies provide their employees this option for a variety of reasons. Let us look at some of them:
- They do this to retain and attract high performing workers
- These businesses aim to make their workers feel like partners or owners in the organization
- They want to acquire the services of skilled workers by giving compensations going beyond their regular salaries. This is particularly true in fresh companies looking to hold as much money as they can.
While the warrants vs options startup debate will always be there, it is good to know that both of them provide people with loads of benefits. Let us understand why stock options and stock warrants are so important and how people benefit from them.
Why Stock Warrants and Stock Options are Important
As mentioned earlier, warrants are quite similar to options in the sense that they allow holders to purchase underlying security for a set quantity and price at a future date. That said, warrants are different from options in the sense that a company issues them. On the other hand, central exchanges (for example, the Chicago Board Options Exchange) offer options.
The share equity, which is often the security that warrants represent, are provided by the issuing company rather than the counterparty. What’s most impressive about share warrants is that they can significantly raise the shareholder’s confidence as long as the security’s underlying value increases with time.
If you are new to the world of stock warrant vs stock option, you’d be surprised to learn that the latter have been a mainstay in most executive compensation packages. Stock options became a massive draw for attracting top talent to up and coming tech companies during the late nineties.
Stock options these days are massively different from what they used to be. Most companies still offer them but usually provide them as an extra perk rather than a replacement for a good salary. Furthermore, executives are not the only people who can benefit from employee stock options. Other employee groups belonging to various businesses can also take advantage of stock options.
Differences between Stock Warrants and Stock Option
People often wonder about the differences, pros, and cons of stock warrants. Truth be told, both of them can benefit you in certain situations. However, you must also be aware of their drawbacks to steer clear from trouble. If you are also wondering about what to look out for, there is no need to worry, as that is precisely what we will discuss below.
What are the Major Differences between Stock Warrants and Stock Option?
As mentioned time and time again in this piece, stock warrants provide stockholders the option to purchase an organization’s shares for specific prices on particular dates. When someone buys a stock warrant, the shares provided to fulfill the obligation come from the organization itself, and not other investors. In stock options, there is a contract between investors that provides stockholders with the right to sell or buy the stock at a specific date and price.
Let us discuss a few major differences between options and warrants:
- Stock warrants offer future capital for companies issuing the stock
- Investors often buy stock options whenever they think the stocks are volatile
- Companies are the ones that issue stock warrants, and not the investors
Warrants are different from stocks because of two primary reasons. First off, companies issue warrants directly. Secondly, there are always new shares issued for warrant transactions. Whenever a company plans to raise extra capital with the help of stock offerings, it could resort to issuing warrants. For instance, if an organization sells a stock at $50, when a warrant is around $5, the chances of the investors exercising a warrant will increase tenfold.
Stock warrants essentially offer investors with a convenient way to purchase stock in companies for prices lower than stock options. Whenever an investor plans to exercise their warrants, they aid the company that issues it by increasing capital through equity.
On the other hand, options are quite different in the sense that the company providing the stock doesn’t make money. Another difference between warrants and options is their lifespan. Options are ideal for people who are looking for short-term solutions, and they could last anywhere between a month to three years. On the other hand, warrants are long term.
As you would expect, investors looking for long-term investments will benefit from warrants due to their lengthy lifespan. On the other hand, people looking to make quick profits will mostly choose stock options. Needless to say, both options provide excellent investment opportunities.
Pros and Cons of Stock Warrant
While stock warrants are all the rage these days, they also have a few drawbacks. Here is a list of the advantages and disadvantages that warrants offer.
- Purchasing stock warrants is significantly cheaper compared to options, as it gives investors the opportunity to obtain shares in an organization with lower capital outlay. You will especially like this option if you seek capital appreciation instead of income
- In stock warrants, the percentage gain is mostly higher
- Stock warrants have tremendous liquidity
- Stock warrant price changes often result in losses for either the seller or the buyer
- Stock warrants lose their worth as soon as they expire. Therefore, holding them for long periods would not be a good idea
- Dividends are not applicable for stock warrants. Therefore, if you plan to invest in them in blue-chip industries, you will essentially forego dividends that you would have received with actual shares
Pros and Cons of Stock Options
Like stock warrants, options also have a list of pros and cons. It would be best if you familiarized yourself with them to make sure you made the right choice.
- Stock options may provide tax benefits in some cases
- Opting for stock options would be a great idea if you are looking for a financial strategy for the long run as they enable employees to buy without paying for the broker’s fee
- Employees can get loads of financial rewards if they get stock options from successful businesses. It significantly increases employee’s motivation and dedication, improving the chances of higher profits
- Stock options could increase staff retention from an H.R perspective, as the stock option’s vesting requires workers to remain employed for specific periods before the selling and issuing of shares
- While stock options provide many advantages, some employees could find the tax implications to be too complicated
- Valuing stock options can be a bit difficult
- Dilution tends to be quite expensive for shareholders, especially in the long run
- Employees have to rely on their coworker’s collective output to obtain bonuses
Are There Any Similarities Between Stock Warrants and Stock Options?
Although you will find several differences between options and warrants, there are some similarities as well. Options and warrants give buyers the right to sell or purchase shares at specific dates and fixed prices. Also, while the life spans of both warrant types are a bit different, a stock option and stock warrant provide investors the chance to obtain profits from the stock’s chance in price without owning it.
How Do I Choose Between Stock Warrants and Stock Options?
While there is no denying that warrants and options have their advantages and disadvantages, a lot of people tend to choose stock options. First off, you can use options for larger varieties of strategies compared to warrants. In addition, purchasing and selling options is way easier as you can trade them on public security exchanges.
Despite not being the popular choice, warrants do provide a variety of benefits. First off, there is loads of potential for capital gains. Since warrants are typically less costly, the chances of gaining profits increase significantly. Warrants are especially beneficial during bull markets, a major reason why they give stock options a tough time during specific parts of the year.
No matter which option you end up choosing, both options have their pros and cons and choosing them depends upon what you are looking for. Therefore, it would be best to think about whether you want to invest for the long run or short run and choose accordingly.
Eqvista is a user equity management software that can manage and store all your stock options and stock warrants details. Our software also helps companies issue and track their company share grants and organize different types of shareholders. Issue, exercise and repurchase your grants seamlessly through the Eqvista app.