Covered Warrants Explained: A Beginner's Guide for Stock Traders

When you are involved in stock trading, you might come across the term "covered warrant." Here are the basics of a covered warrant and what it means to you as an investor.

Covered Warrant

The covered warrant is an agreement that allows you to purchase or sell a predetermined amount of a security. You will be working with a specific financial institution in order to gain access to this type of warrant. You will then be able to purchase the securities directly from the issuing financial institution. You will typically be working with a bank for this type of transaction. You will need to buy or sell the securities by a specific date and at a predetermined price.

Features

The covered warrant has several features that make it different from a traditional warrant. You can use a covered warrant to secure many different types of securities. With a traditional warrant, you will have access only to stocks.

This type of warrant is also issued by financial institutions only where a traditional warrant is issued by a specific company.

A covered warrant also gives you the flexibility to purchase or sell a particular security. By comparison, you can buy only securities with a traditional warrant.