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What is a Warrant Coverage?

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  • Written By: Luke Arthur
  • Edited By: C. Wilborn
  • Last Modified Date: 04 December 2016
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Warrant coverage is a type of financial tool that is provided by a company that is issuing stock as a benefit to investors. With warrant coverage, a company provides an investor with the opportunity to purchase additional shares at a specific price. This tool can be a powerful investment tool that an investor can use to increase returns in the market. One of the big advantages of warrant coverage is that it gives the investor flexibility in his or her options.

Similar to an option, which gives an investor the right to buy or sell a security from another investor at a specific price, warrant coverage is provided to investors by the company that issues stock. With this tool, a company authorizes a buyer to purchase an additional amount of shares of stock in the future. The warrant coverage is essentially a contract that is entered into by an investor and a company in order to provide additional investment opportunities to the investor.

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Typically, the warrant coverage will provide the investor with the opportunity to purchase an additional amount of shares based on the percentage of the price of a prior purchase. For example, a company could provide 50% warrant coverage to investors. This means that an investor will be able to purchase an additional 50% of the original number of shares at the same price at which he or she previously purchased them; if he originally bought 500 shares, he could buy 250 more at the same price.

If the price of the stock increases substantially over time, the investor could exercise this warrant and purchase the additional shares to generate a profit. The investor knows that he or she would be able to sell these shares at a price that is higher in the market. The investor could then purchase the shares at the lower price and immediately sell them at the higher price. Sometimes, investors will not sell the shares immediately but will hang onto them to realize even greater profits.

Another benefit of this type of investment is that investors are not obligated to make additional purchases in the future. Just because an investor has the warrant coverage that allows him to purchase additional shares, it does not necessarily mean that he has to. This increases the level of flexibility for the investor and provide him with additional opportunities. Many investors like to have the option of purchasing additional shares without being forced to it the price of the stock declines rapidly.

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