Warrant checks are frequently attached to investing, particularly in real estate and stocks. A warrant is a financial derivative that entitles you to purchase an underlying asset. It differs from something like an option because the purchase rights come with a fixed price.
A warrant check verifies the existence of the asset, its legal availability for sale, and the associated terms. If you're curious about using a warrant and doing a check, you should know the following four things.
Not a Financial Instrument
The underlying asset is the financial instrument. Warrants are derivatives. Suppose a development company wants to raise money for a real estate project. It could sell warrants to investors who then have the option to exercise them to purchase the underlying real estate. The investor pays once for the warrant and a second time if they wish to exercise it.
From an investor's perspective, this offers some insulation in case the project goes belly up. The developer benefits from access to startup cash for the project. As long as things go well, the developer also can expect the warrant holders to be ready to then buy the real estate. Especially in a booming real estate market, this may be a good way for investors to turn a profit. The warrant locks in the price, and then market growth might increase the value.
What Can You Warrant?
A warrant can cover almost any underlying asset. Customers in the commodities industry might purchase warrants for the delivery of supplies. When the time comes to take delivery, they exercise the warrant and purchase the materials. You can also issue or acquire a warrant for real estate, bonds, stocks, currencies, and mutual funds.
Notably, a warrant will have an expiration date. If you don't exercise the warrant before then, it usually expires and becomes worthless. Some warrants may have terms that return part or all of the money to the holders. Refunds are more common when an equity firm uses warrants to fund a merger. However, you'll want to closely read the terms to understand what happens on the expiration date.
What Does a Warrant Check Accomplish?
A warrant check confirms that the asset exists. It also covers the terms of the warrant to verify the exercise price, the expiration date, and any relevant information about the issuer. It may be months or years between the issuance and the exercise of a warrant so a check is critical due diligence.
For more information about warrant checks, reach out to a local service.