Companies need constant financing and so they look for ways to raise capital. One way they do it is to issue debentures. These debentures are also called bonds or notes. They are essentially debt instruments. Investors give an amount to the company and in return they get fixed regular interest income from the investment. Debentures come in two kinds: the convertible debenture and non-convertible debenture.
Just from the name you can tell that convertible debentures are more attractive and appealing to investors because of the fact that it is a bond that can be changed to stock options. With this financial instrument, an investor can make profit in two ways: through regular payments of interest, and through the increasing bond prices brought about by an increase in the value of the stock. This option combines the best attributes of both stocks and bonds. On the other hand, non-convertible bonds are not convertible in any way, meaning, an investor cannot exchange the bond for equity shares of the liable company.
Convertible bonds have some advantages for those investing in them. First of all, they follow the market prices of shares. If shares go up, so do these bonds. However, they will only increase to around 2/3 of the rise in stock prices. Similarly, in times of economic weaknesses, they will also only decrease to around 2/3 of the fall in stock prices. So, you can say that there is some form of safety when you invest in this financial instrument.
One investing advantage of this is that the interest from the bond can be collected until such a time that stock prices reach the conversion ratio of the prices per share. These bonds are also a great way to protect yourself from market fluctuations while giving you the bonus of annual gains at the same time.
Stocks in the technology sector often have a promising future. Before, technology companies do not issue any debentures. They simply offered an equity stake for investors. Now, many technology firms which are small and medium in size are now giving debentures, particularly convertible ones. While they are growing, you can receive consistent interest income. And when they are in stage of rapid growth, you can switch gears and convert the bonds to equity shares so you can ride the explosive growth and make lots of money in return.
Many investors put their money in these since they can get regular interest income, which is a higher return than many investment vehicles like certificates of deposit. Although they carry a lower rate of return as compared to the non-convertible ones, the conversion feature is a potentially lucrative option to take because shares offer a much higher return than bonds. When the opportunity arises to make money by converting the bond, it should be done to enjoy higher returns.
Even if you don’t convert the bond into stocks, you still get a definite yield from the bonds, which are much higher than other investment instruments like bank deposits. You also get back your principal investment. These features make these bonds a solid investment option for investors. They are also popular with those who don’t like volatility in their investments. These bonds offer a good and consistent return and an option to participate in higher return with its conversion feature.
Before you invest in these, you better learn more about them. Also, familiarize yourself with stocks too, so that you know what you are getting into when you exercise the conversion feature. In this way, you will be able to minimize the investment risks and be able to take advantage of the potential returns.
The critic who wrote this piece has found a well respected investment relations vet by the name of Josh Yudell. Josh Yudell is also the Managing Director of a private equity fund and is credited with the creation and popularization of a funding vehicle known as a PSSO (Private Secondary Shareholder Offering).
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