Difference Between Option and Warrant In Stock Market
Option and warrant are terms that you hear in derivative and stock market very commonly. As both these have similar leverage characteristics people tend to get confused between them.
Stock option is agreement or contract between the stock owner and the buyer. Stock owner and buyer can be two people or institutions but both of them are investors who trade in stocks at the market price.
Stock warrants, on the other hand, are contracts between financial institution and the investors. These financial institutions and investors issue warrants on behalf of the company whose stocks are being traded. Any company buys or sells stocks from the investors if it wants to issue stock warrants. Issue of stock warrants encourages the sale of the stocks of a company and helps in thwarting losses because of reduction in the value of the stocks.
To understand these terms in a better manner let us compare these two.
- Stock options are contracts between investors while warrants are contracts between investors and financial institutions.
- Companies do not earn profit in transaction of stock options while they do so in case of warrants.
- There are strict rules for selling options while the terms of sale for warrants are flexible.
- Stock options can be exercised anytime while warrants can be exercised only after they expire.
It is better to take professional advice before you trade in any of these.