Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends.
Warrants are actively traded in some financial markets, such as the German and Hong Kong stock exchanges.
Unregistered warrant transactions can still be facilitated between accredited parties and in fact, several secondary markets have been formed to provide liquidity for these investments.
Financially they are also similar to call options, but are typically bought by retail investors, rather than investment funds or banks, who prefer the more keenly priced options which tend to trade on a different market.
Covered warrants normally trade alongside equities, which makes them easier for retail investors to buy and sell them.
In the above case, the mutual fund selling a one-year warrant exercisable at $500 sends a signal to other investors that the stock may trade at $500-levels in one year.
If volumes in such warrants are high, the price discovery process will be that much better; for it would mean that many investors believe that the stock will trade at that level in one year.