Detachable Warrant

What it is:

A detachable warrant is a warrant that can be sold separately from the security to which it was originally attached.

How it works/Example:

Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time.

Occasionally, companies offer warrants for direct sale or give them to employees as incentive, but the vast majority of warrants are "attached" to newly issued bonds or preferred stock.

For example, if Company XYZ issued $100 million of bonds with warrants attached, each bondholder might get a $1,000 face-value bond and the right to purchase 100 shares of Company XYZ stock at $20 per share over the next five years. Warrants usually permit the holder to purchase common stock of the issuer, but sometimes they allow the purchaser to buy the stock or bonds of another entity (such as a subsidiary or even a third party).

Warrants are often detachable. That is, if an investor holds a bond with attached warrants, he or she can sell the warrants and keep the bond.

Warrants are not the same as call options. Call options are not detachable and they often expire far before warrants do (usually less than a year, versus five or more for warrants). Warrants are also not the same as stock purchase rights. The exercise price of a stock purchase right is usually below the underlying security's market price at the time of issuance, whereas warrant exercise prices are typically 15% above market price at the time of issuance. Also, companies often issue stock purchase rights only to existing shareholders and they also have very short lives -- generally two to four weeks.

Why it Matters:

Warrants trade on the major exchanges. In some cases where warrants have been issued with preferred stock, stockholders may not receive a dividend as long as they hold the warrant. Thus it is sometimes advantageous to detach and sell a warrant as soon as possible if the investor expects to earn more from dividends.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.