For the past few weeks, this blog has been focusing on different methods of investment that you can engage in besides just the usual stocks and bonds, for instance our last post covered investing in Common Stock. The idea is that by doing so, we’ll be expanding your concept of investing and making you a better, more well rounded investor in the process.
What Is Convertible Security?
This time, we’re going to talk about something known as the convertible security. Simply put, this is a bond that can be converted into a stock. When you purchase a bond in a company, you’re buying the right to later on, at your discretion, concert the value of that bond into a number of shares of stock. Clearly, there are times when doing this would be advantageous and times when it would be better to simply keep the bond itself. This is the purpose of the convertible security: it allows you to make that decision for yourself.
Of course, this option doesn’t come without a cost. Typically speaking, convertible securities offer a lower initial yield than other types of investments, because of their modular nature. At the same time, however, if you’re holding a bond and a company goes bankrupt, you’re among the first in line to be repaid, ahead of those who simply are holding stock.
Buying And Selling Is Easy
One other major risk of convertible securities is that most companies withhold the right to “call” these bonds, which means that they can theoretically at any time convert them all into stock at their discretion. While this is rare, it’s something that everyone investing in convertible securities very much needs to be aware of.
Buying and selling convertible securities is fortunately a very easy matter. Most all brokers deal with them just as they would stocks and bonds, so you should be able to dabble in this type of investment fairly easily. Once you get a taste for it, you can decide whether or not it’s really for you.
See you next week for part 5 of Investments.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 3 comments… read them below or add one }
Hi Sean,
I’m not sure I understand the difference between a stock and a bond. I have to do some research on this. I’m not sure why you’d buy convertible securities. I need examples, Sean of when you’d buy them and when you’d convert them to stocks and when you’d hold onto them.
I know you’re writing this for beginners but I think I know less than that.
Hi Jazz
There is a difference between Stocks and Bonds. Bonds are backed by financial institutions and /or Banks so they have that security there.
Sean, spelling error:
Paragraph: What Is Convertible Security?
Third line down: ‘concert the value of that bond’
I think concert should be convert