The Convertible Craze Brightens The Future Of Equities

Convertibles are stealing the show with their safe investment image in today's "protective" market. They seem to be overshadowing the stocks and bonds, and this holds true for the mediocre issuers.

A convertible bond, as the name suggests, can be converted into a company's common stock. The bonds are a source of additional profit for the investors. Although investors are particular about short-term performance of stocks, they're upbeat about a long-term, fixed-income instrument that gives them profit on converting to common stock, if the stock price soars within a range of 20 to 40 percent.

Why the sudden craze for convertibles? The chief reason is the strong desire of the investors for "safe" instruments to lock up their precious life savings into. And the issuers have been smart enough to grab this lucrative opportunity. A few years back, liquid issuers-considered to be the stalwarts of the market-were ruling the roost in the convertible bond market, with the average size of a convertible issue touching $300 million to $350 million. But today, nearly nine convertibles have a whopping size of $1 billion and one has even crossed the $3 billion mark. The fall in stock prices and the frequent quivers in the credit markets have created a strong wave of demand for convertibles.

A convertible bond is issued at a strike price, 25 to 40 percent higher than the market price of the general stock issued by the company. The convertible bond has a 7-year maturity period and can be called after three years. The issuer can call the bond, if the market price exceeds the strike price. But if the strike price manages to remain high till maturity, the investors have two options: they can either get back the par value of the bond, or convert it to common stock. However, in case of a mandatory convertible, there is no choice-the bond has to be converted to common stock.

Convertible bonds are legally debt securities, which are above all equity securities in a default situation. Similar to other bonds, their value is also influenced by the existing interest rates and the credit worthiness of the issuers. However, convertibles have opened two ways for the investors to earn dollars. One way is by selling the convertible bond when its price soars in the market, and the other way is by converting the bond to common stock and selling the shares.

The best way for an individual investor to indulge in the convertible bonds business is buying a mutual fund. This is because convertibles are complex securities and, unlike common stocks, it's not easy for beginners to get all the information about them. Hence, the investors should check out certain things before buying a convertible bond. These are: the interest rate and yield of the bond, the number of years prior to maturity, the common stock price during conversion of the bond, the features of the bond that make it different from a usual bond, the negative aspects of the bond, and the benefits while converting to a common stock.

Besides this, the investors should also inquire about the company that is issuing convertibles. Any bond, either convertible or the general one, is a loan. Hence, the investors should ensure that their issuer has the capability to pay back what they owe. Therefore, going for a convertible bond demands an extensive homework on the part of the investor.

When we compare convertible bonds to convertible preferred stocks, the former are safer. There are two reasons for this: the interest on convertible bonds is paid before any stock dividends, and, if the company suffers a loss, the investors of convertible bonds have an upper hand over the investors of stocks while claiming the money.

However, it's not prudent to get carried away by the benefits of convertibles. Firstly, convertible funds happen to be costlier than domestic stock funds, as the former come packed with sales charges. Secondly, a majority of the convertibles are issued by companies involved in technology and telecommunications, which are characterized by unpredictable markets. And lastly, convertible bonds don't guarantee a risk free investment just because they are convertible.

James Marriott is a finance writer with more than 15 years of experience in writing financial content, including those related to credit cards, mortgages, stocks, investments, and funds. He has been with RNCOS, a premier financial writing services company, for 2 years as head of financial writing. He is also a regular financial columnist with renowned business journals. For your comments on the article and further financial assistance, please contact our staff writer at info@rncos.com.

---

Sell Discipline for Investors: Importance and Execution

Investors usually don't have an aversion to buying an asset. The real gut wrenching decision is when - and if - to sell. What most don't realize (or don't want to realize) is... Read More

High Volatility Investments

Penny stocks and options are high volatility investments that attract both the trader and the long term investor because of the small amount of capital required to make substantial gains as compared with... Read More

Keep Stock Market Investment Profits

Have you had one of those huge investment winners ? a stock that went from $2.00 to $80.00? Or any other numbers you want that gave you a gigantic percent profit?Did you take... Read More

Caveat Emptor: You May Owe Taxes Despite 401(K) Losses!

One among many ways you lose money in non-indexed mutual funds is the tax trap. You may have to pay taxes even when your mutual fund loses money! To many people this is... Read More

Copy Cat or How to Use a Successful Trading System

How many books have you read about successful traders? How they did this or that and made a fortune and are still doing it. You say to yourself, "I'm going to follow his... Read More

Investing As A Sport?

I said last week that money doesn't generally buy happiness, but the lack of it can buy absolute misery. This, by the way, is not just my personal observation. It is the conclusion... Read More

An Old Dividend Stock Investment Idea, for a New Generation

Death and taxes! The certainties of life! And then, of course, there are the mortgage payments, the utility bills, phone bills, the car payments and thirsty automobiles. Add that to the grocery and... Read More

5 Ways To Protect Your Bond Portfolio From Rising Interest Rates

The Federal Reserve recently raised its target federal funds rate for the first time since March 2000. This could be just the tip of the iceberg, though, as many experts believe rising inflation... Read More

Angels, Are They Real?

They're real, but few survive. High risk investing is dangerous to your bank balance. The process toward extinction is that an angel risks money in one venture. It fails. Then, he joins a... Read More

What is an Investor Ready Business Plan

A Business Plan, as all good entrepreneurs starting out in life should know is the foundation, or rather a springboard, towards the establishment and growth of a new business. A business plan is... Read More

Trading Expert Discovers Ways To Beat Stock Market Odds With Money Management

The first point to mastering money management is that you have to understand when you're trading on the stock market is that you are playing the odds ? but unlike many forms of... Read More

Day Trading the SP Futures with Initial S/R and the NYSE TICK

For instance, if the market moves up in the first 20 minutes of trading, touches the initial resistance zone, and then turns down, this implies that a good tradable downtrend move is likely... Read More

Why Do You Want to Become a Online Trader?

Motivational guru Tony Robbins teaches that the reason for doing something rates much higher than the methods you use to get the job done. In order to make your goal REAL, you need... Read More

Stock Market Money Management Skills

Let's start by saying: You can't be afraid to take a loss. The investors that are the most successful in the stock market are the people who are willing to lose money.Having a... Read More

How To Start Investing For Financial Independence, Part 1

Today, I am going to start a multi-part series about how to go from being a beginning investor to being "financially independent" in a steady and predictable way. At our website, we get... Read More

Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with quick, short term movements, and are not in the business of holding positions overnight let alone a week or two. So the use... Read More

Learn How to Lose and Risk Management

One of the leading traders on Chicago Mercantile Exchange, because of a single trade lost everything!For all of his years of experience and money, he had failed to master the most important concept... Read More

Waiting 20 Years Can Cost You Millions - Dont Wait Start Today

Many Young people live for Today. They really don't fully understand the power of compound interest. The Difference between investing as little as $20 a week at age 20 or waiting until age... Read More

Why have Investment Plans for the Stock Market

If you do not have an investment plan in the stock market you are subject to impulses, urges, hunches, premonitions, strong feelings, greed, panic, fear, indecision, and just plain foolishness. In my opinion,... Read More

Investment Rowing

You have rowed a boat at some time haven't you? Yes, put the oars in the water and pull. Of course, you don't know where you are going because you are sitting backwards.... Read More

Discipline in Trading and Investing

The one thing I can think of that most affects both trading and investing has to be self-discipline.Being disciplined is fully 50% of the job of trading or of investing. I don't care... Read More

Margin Benefits are Marginal at Best

Margin is one of those things that novices find puzzling about the stock market, but the concept is really quite simple. Still, with understanding the basics of using margin accounts, determining the wisdom... Read More

Franchise Investing, Franchise Opportunities and Franchising Renewals

Have you considered buying a franchise instead of trying to start a business from scratch. Many franchise agreements are renewed every five or ten years, automatically. If you do not want to renew... Read More

Bankers in Denial

Denial is a ubiquitous psychological defense mechanism. It involves the repression of bad news, unpleasant information, and anxiety-inducing experiences. Judging by the German press, the country is in a state of denial regarding... Read More

Larry, Moe and Curley, Investment Brokers

Larry, Moe and Curley were sitting in their favorite restaurant just off Wall Street having their usual 3 martini lunch and were discussing the day's events and their client portfolios.Larry:"I had 12 calls... Read More

What Is A Fair Market Value, Really? If Youre Going To Trade, Be Sure Its Worth It!

I've been involved in online trading, specifically with stock and index options, for several years. In this time, I've spent a great deal of time thinking about value and the fact that anything,... Read More

Investing In Sons Business Could Cause A Real Family Feud

Q: My youngest son wants to borrow $5,000 to start his own business. My wife is afraid to tell him no. She thinks we should just give him the money and not expect... Read More

Your Worst Enemy To Successful Investing - The Media

How do you make your investment decisions and where do you get your information? If you're like most of the people I know, you look to the experts.That's fine, however it's important to... Read More

IF - The Wonders of Investing

If it seems as if all investors are selling, who is buying?... Read More