Convertible securities. A convertible bond or convertible debenture is a corporate bond that can be converted into the company s common stock under certain terms.
Convertible preferred stock carries a similar conversion privilege. These securities are intended to combine the reduced risk of a bond or preferred stock with the advantage of conversion to common stock if the company is successful. The market price of a convertible security generally represents a combination of a pure bond price or a pure preferred stock price plus a premium for the conversion privilege.
Many convertible issues are listed on the NYSE and other exchanges, and many others are traded over-the-counter 4.5 OptionsAn option is a piece of paper that gives you the right to buy or sell a given security at a specified price for a specified period of time. A call is an option to buy, a put is an option to sell. In simplest form, these have become an extremely popular way to speculate on the expectation that the price of a stock will go up or down. In recent years a new type of option has become extremely popular options related to the various stock market averages, which let you speculate on the direction of the whole market rather than on individual stocks.
Many trading techniques used by expert investors are built around options some of these techniques are intended to reduce risks rather than for speculation. 4.6 RightsWhen a corporation wants to sell new securities to raise additional capital, it often gives its stockholders rights to buy the new securities most often additional shares of stock at an attractive price.
The right is in the nature of an option to buy, with a very short life. The holder can use exercise the right or can sell it to someone else. When rights are issued, they are usually traded for the short period until they expire on the same exchange as the stock or other security to which they apply. 4.7 WarrantsA warrant resembles a right in that it is issued by a company and gives the holder the option of buying the stock or other security of the company from the company itself for a specified price.
But a warrant has a longer life-often several years, sometimes without limit As with rights, warrants are negotiable meaning that they can be sold by the owner to someone else, and several warrants are traded on the major exchanges. 4.8