What Exactly Is a Warrant?

Occasionally, when you look through a mutual fund’s holdings, you’ll come across securities called warrants. What are they, and why would anyone want them?

Warrants are almost identical to stock options. These securities allow the holder to buy a company’s stock at a predetermined price, called the strike price, for a set period. If the stock’s price rises above the strike price, the warrant holder can purchase shares at a below-market price.

ILLUSTRATION: LINDSAY HOLMES

Warrants themselves also can be bought and sold. Their value generally moves up and down in the same direction as the price of the stock they’re tied to.

They are issued by a

company and can serve an important purpose, making a potentially risky offering more attractive by giving buyers a bigger upside. For example, a mining company might sell common stock to fund the exploration of a mineral deposit. At the same time it will often offer warrants free to the buyers of the stock, says Brian Hicks, a portfolio manager at San Antonio-based U.S. Global Investors .

After the exploration is completed, if the mineral deposit is determined economically viable, then the value of the stock and warrants will jump. Put simply, the holder of the warrant gets a financial kicker for buying common stock in a risky venture.

Most warrants have a maturity of one to two years, though they can last 10 years, says Mr. Hicks. The $99.2 million US Global Investors World Precious Minerals fund (UNWPX) owned warrants issued by mining firm Dundee Precious Metals Inc., a Canadian company, at the end of 2014, according to the fund’s annual report.

Mr. Constable is the host of the News Hub show at WSJ Live online. Email him at simon.constable@wsj.com.

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