Inducement

• In the normal course of business, companies often issue bonds or preferred stock to raise funds for expansion, debt reduction or general operating expenses. As an inducement to investors, typically when there may be greater risk involved, corporations will often include stock purchase warrants as part of the issuance. These warrants provide for additional ways to profit if the company does well.
  
  

Seniority

• Bonds and preferred stocks are known as senior securities. They must be paid off, redeemed or otherwise satisfied before holders of common stock have legal right to the distribution of company assets in the event of a bankruptcy or liquidation. Stock purchase warrants are subordinate securities and may have no ultimate value unless the price of the company's common stock increases or stays above a certain level within a fixed time frame.
  
  

Call Warrant

• A call warrant represents a legally binding contract that covers a specific number of shares of common stock that the holder can purchase from the issuing company at a set price on or before a predetermined date. Warrants on the call side can provide significant upside, as the company is obligated to fulfill the contract regardless of the price the common stock trades for publicly. For example, if the warrant allows the holder to buy the stock at $10 per share and the shares are trading at $30, investors can realize an additional $20 gain for each warrant.
  
  

Put Warrant

• Warrants on the put side, by contrast, permit holders to sell back to the issuing company a fixed number of shares at a specific price on or before the agreed-upon date. This provides significant protection to investors, who have a way to sell the stock at a set price even if the shares drop significantly on the open market. A company's insolvency, however, negates this feature if there is no money to pay for redeemed stock.