Definition of Convertible Security
A convertible security is nothing but a type of investment that can be converted from one form to another. There are two major types of convertible securities that are very common are:
- Convertible bonds
- Convertible preferred stock
The above-mentioned convertible securities can be changed to common stocks or equity stock. A fixed amount is paid periodically by convertible security in the form of coupon amounts especially the convertible bonds. If they are convertible preferred shares the payments are in the form of a preferred dividend. In order to convert them into common stocks, they have a specific price.
The securities that don’t have the feature of converting will offer high payouts when compared to convertible security’s payout. But because of the possible profit that can be got from sharing the valuing of the common stocks of the firm by the convertible feature, the investors are willing to take the risk.
Value of Conversion
The determination of the value of the conversion is done just like how it is done in the call option of the common stock. The conversion price meaning the price at present at which the asset can be converted into common stock is commonly set a price that is more than the stock is currently priced at. The call value of the stock will be high if the price to convert the security is close to the market price. Depending on the par value and coupon rate, the value of the underlying asset is decided. To find what the full valuation of the security both these values are summed up.
Based on how well the convertible security will perform will highly influence the price of the underlying common stock. Under two conditions there will be an increase in the degree of correlation:
- If the price of the stock proceeds towards conversion price.
- If the price of the stock exceeds the conversion price.
On the other hand, the stock is traded as a straight bond or preferred stock if the price of the stock is very less than the conversion price as possibilities of the conversion is seen as remote. You can remotely do trading using Olymp Trade but this software is not trustworthy and for new traders as it offers not even the basic knowledge needed for trading, you need to look for other software to rely on for long-term if they want to progress in the field of trading.