Warrants on Wall Street

You may have heard of warrants in law enforcement; they exist on Wall Street, too. Sort of. Like the part-man, part-beast Minotaur of Greek mythology, financial warrants share characteristics of both stocks and options. They trade like stocks, but unlike stocks, they don't represent real chunks of companies you can buy and own. Instead, like an option, a warrant gives you the right to buy a stock at a preset price during a preset time period.

Most options expire within a few months. Warrants, however, are usually good for a few years, until the company "calls" them. Calling essentially forces holders to exercise the warrants by buying the stock at the preset price.

Like options, warrants are more volatile than their underlying stocks. Their appeal is that your money can buy you many more warrants than shares of stocks. This leverage can help you make more moolah than if you simply bought the stock. But it's also a heck of a lot riskier; your warrants can end up close to worthless if the market doesn't go your way.

You can learn more about how the financial world works in our Investing Basics area and in our Fool's School.

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