Warrant

Financial Dictionary -> Investing -> Warrant

A stock warrant is a written document that gives the holder the right to buy shares at an agreed price, within a specific amount of time, although they can also be issued with no time frame. The agreed price is usually worse than the current market price and remains fixed, meaning the holder has to wait for the stock price to rise, then invoke the warrant and sell the shares at a profit. Obviously this has to be done within the time frame specified which tends to always be longer than a year.

If stock prices take a downturn and the investor would end up losing money if they used the stock warrant, then they can simply let it expire. The holder is not required to make the purchase, it just gives them the right to, and so if it looks unfavorable then they can just leave it, but they will still be out of pocket for the original price.
Once issued, stock warrants can be traded freely on the open market, so the original owner does not have to be the person that exercises the warrant. This may be done if the investor needs a quick return.

Warrants are issued with full backing of the company and are often used to entice investors in to buying more stock, or as consolation to previous investors of a company that is emerging from bankruptcy, that can't offer regular shares because they haven't fully recovered. It is also common for hot prospect startup companies that are likely to do well over the long haul to issue stock warrants that can be exercised later on for good profits.
There is a lot of paperwork involved with exercising stock warrants so it is best to use a broker to take care of everything for you.