What is convertible security?

Convertible security is any type of security that has the potential to be exchanged for other forms of security offered by the same issue. In general, there are certain conditions that must be met before transformation can occur. Depending on the structure of the contractual conditions associated with convertible security, the issuer and investor may have the ability to start the transfer process.

One of the more common examples of convertible security situations is related to bonds issued by a particular company. The issue of bonds can be structured in such a way as to transfer the bond to the shares of the ordinary shares at a certain point in the life of the bond or at the moment of maturation. In this bond example, the price will be related to each share issued under the bond transfer, specified in the conditions that apply at the time of the bond. The investor receives shares with shares instead of interest returns of purchasing and the bond is considered a pensioner.

Another relatively frequent use of convertible security is related to the conversion of the custom of its own capital. Businesses and municipalities that issue bonds for short -term funding use this model quite often. An investor who decides to accept his own capital in exchange for his interest in the bond problem, often increases the investment in the long run.

Less common occurrence with convertible security is related to the conversion of preferred supplies to the ordinary share. Within this scenario, there may be a shares of an investor that hold the stock preferred shares that can exchange these shares for ordinary shares. In some cases, the issuer and not the investor must initiate this conversion process. Usually, however, this is the basic reason for this event, which should eventually protect both the issuer and the investor.