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Even if many investors are actively engaged in stock trading, not all of them are familiar with convertible bonds. But what are these bonds and are they worth your time and money? Generally, convertible bonds, also termed junior debentures, refer to corporate bonds that can be transformed by the owner into equity shares of a company at some point in the debenture period.

These bonds incorporate what’s so great about both stocks and bonds and provide a totally distinct investment option to stock investors. Is this bond the best investment option for you? Read on to understand more about it advantages and disadvantages.

When you resort to convertibles, you can be very sure that you will earn money regardless of the trading status of the stock. The greatest feature of this bond is its high probability to increase its price when the stock rises. Investing in it is like enjoying the privileges of both realms where you have two options to make money.

Unlike other bonds, bonds like these are more beneficial in the sense that you are still secured even if the stock prices drop. These are commonly marketed at a premium over the share’s price and that premium can be earned back in about 3 to 4 years after the bonds are bought. And not only that; investors can also rake in more profits since they can get regular payoffs of interest and enjoy the increase in bond prices whenever share prices go up.

But what’s the downside when investing in these bonds? First of all, convertible debentures are callable. The company that issued these bonds can redeem the bonds whenever they want to do so. This means that if you invested your money thinking that you would be reaping the reward in the years to come, you may be forced to reinvest it in less attractive options.

In addition, you are not allowed to exchange these bonds to stocks on a whim. Before doing this, you have to ensure first that the stock’s cost already hit a specific amount known as a conversion premium. So, if you plan to become a shareholder of the company, you should just buy the stocks at a bargain price rather than wait for them to arrive at the conversion premium.

You should not forget that companies which offer these are usually those who are suffering from a financial downturn. These companies are often small-scale businesses who cannot afford to offer company shares or bonds. Company owners seeking to raise their financial resources usually gain more funds by offering either bonds or stocks. If it is not possible to issue bonds or company shares, business owners resort to offering this type of bond. Only buy them if you are confident in the growth potential of a particular company and if you’re sure that they will not fail in the coming years.

Just like any other kind of bond, you can expect both benefits and risks when you invest money in a convertible bond. However, there are people who consider these bonds as their greatest option. Before putting your money in this investment option, it is still best to analyze everything so your money will not be wasted.

The writer of this story has distinguished an expert named Wbfu Lhqryy. Josh Yudell is the CEO of a large and well-respected investor relations firm and has run market awareness campaigns for hundreds of public companies.

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