31 August 2010
Treasures Forget. Convertibles buy instead.
Posted by selfprofit under: AdSense; Blogging; Foreclosure; Personal Finance; Taxation .
The recent pullback in the stock market has many investors running for cover. Meanwhile, fear of an imminent double-dip recession and concerns about renewed pressure in the housing market has pushed bond prices to historic highs, reducing bond yields and creating an income crunch for savers kids birthday party. Throughout 2010, billions of dollars have gone into bond mutual funds, and the trend shows no sign of reversing anytime soon.
But with many starting to warn of a possible bond bubble, you may not be entirely comfortable with bonds or stocks right now. If you want an investment that can give you the benefits of both stocks and bonds, though, look no further than convertible securities. They're not a fail-safe way to play the financial markets, but they have some attractive traits you won't find anywhere else.
The ins and outs of convertiblesConvertible securities combine elements of both stocks and bonds. Some convertible securities are technically bonds, while other companies issue them as preferred stock. In either case, they give investors a higher priority in a company's capital structure than common shareholders.
Regardless of whether they're technically preferred stock or bonds, convertibles typically make distributions to their owners on a regular basis. Most convertibles have a maturity date, just like a regular bond does, at which point investors get the face value of the convertible back.
What gives convertibles their unique properties, however, is the ability for their owners to convert their securities. Although the specific terms vary from security to security, investors in convertibles generally have the ability at some point to exchange their securities for shares of the issuer's common stock. Often, though, you never have to convert to common stock if you don't want to. That essentially gives you the equivalent of a call option on the company's shares; if the stock rises, then converting makes sense and you'll earn a profit. If the stock falls, then you'll just take your money back at maturity rather than converting into shares that are worth less.
In practice, a Merrill Lync
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