Warrant Purchase

• Investors purchase stock warrants expecting that a company will grow. Stock warrants have costs and convey the right to buy a company's stock at an exercise price specified in warrant terms. The exercise price often is set higher than the current stock price so investors can benefit from their stock warrants only if the company has grown. When the growth of a company has led to a stock price increase, investors likely exercise their warrants if the stock price has risen above the warrants' exercise price.
  
  

Warrant Liability

• Stock warrants become a liability that a company must fulfill when investors exercise their warrants. When investors initially purchase their stock warrants, companies receive cash as warrant sales revenue, and this increases a company's net income. Thus, the selling of stock warrants may have a positive impact on a company's stock price at that time. Like any new share issuance of a stock, however, warrant exercise by investors can have a negative effect on existing shareholders in terms of earnings and stock price.
  
  

Earnings Dilution

• Companies provide investors with new shares at a price lower than the current market price when warrants are exercised. While stock warrants help companies sell shares when market conditions are unfavorable, they prevent companies from benefiting from later improved market conditions. Being unable to sell shares at higher market prices constitutes unrealized losses for warrant-issuing companies. Stock warrants also dilute a company's earnings for current shareholders. As the total number of shares increases, the amount of earnings per share decreases, likely resulting in downward adjustments in the stock price.
  
  

Price Decline

• Stock price also tends to decline with the exercise of stock warrants because of potentially increased selling pressure on company shares in market trading. For some investors, the purpose of purchasing stock warrants is to profit at a future time from the price difference between the exercise price and the market price. Therefore, while some investors keep their newly acquired shares from exercising stock warrants for more growth, others may sell their shares for quick profits following the exercising. The increased selling puts downward pressure on market trading of the stock, causing price declines.