How the stock market works

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12. Convertibles

Convertibles are instruments which companies sell to raise money. They pay the purchaser a fixed amount of income every year until the convertible matures, and in that sense they are a bit like bonds.

The twist is that convertibles can also be converted into ordinary shares at certain times each year. The conditions for converting vary (e.g. £7 of convertible stock can be converted into 9 ordinary shares) but in general if the share price of the company does very well, it will be in the holders' interest to convert. If it does badly, they will be better off sticking with the fixed income.

From the point of view of ordinary shareholders, convertible shares represent a threat of dilution (because if converted, there will be more ordinary shares in issue).

1. Why do companies list on the Stock Exchange? 2. Offers for sale 3. Offers by tender, and other methods of admission 4. The Official List 5. AIM and OFEX 6. Different types of share 7. Reasons for market indices 8. The FTSE indices 9. Sectors 10. Scrip issues 11. Rights issues 12. Convertibles 13. Warrants 14. Share buybacks 15. Shareholder perks 16. Suspension 17. Insolvency 18. Conclusion