What Is Convertible Redeemable Preferred Stock?
Companies issue stock to raise money to invest in their business and to finance new initiatives. When investing in companies, you can take advantage of the various types of shares and how companies have structured them to match your investment goals. Convertible redeemable preferred stock are flexible instruments with reduced risk. Redeemable shares can be bought back by the issuing company under agreed terms. A redeemable share is convertible when it can be exchanged for similar shares in the same company.
A redeemable stock allows a company to purchase the stock back at a future date. With a convertible redeemable share, the investor can exchange the stock for common stock in the company.
Reason for Redeemable Shares
Choosing stock that has the characteristics matching your needs helps ensure that your investments give you the return you want. If you've invested in a redeemable share, it allows you to turn your redeemable convertible preference shares back in and get common stock as necessary. This, in turn, gives you flexibility and reduced risk.
For companies, convertible stocks offer the chance to earn more operating income over the life of the investment since shareholders receive fixed income until conversion. However, these stocks are also attractive to investors, who enjoy being able to participate in growing companies while offsetting risk if the stock doesn't do as well as they'd hoped.
Exploring Common Stocks
When you invest in stocks, you are looking for a combination of income and capital gain. Besides this return on your investment, you are ready to assume a certain level of risk, and you want a given flexibility in being able to sell the shares. Common stocks have a relatively high risk, can generate little income and are very flexible. If that profile doesn't match your needs, you can consider more complex, structured stock investments with additional characteristics.
Evaluating Preferred Stock
As indicated by its name, preferred stock comes ahead of common stock when a company issues payments. Such payments might be regular dividends, special dividends or payments upon liquidation or restructuring. This means preferred stocks are less risky than common stocks and that they can generate a regular income. When you invest in redeemable convertible preference shares, you can count on getting dividends every three or six months or annually -- depending on the company's dividend payment schedule -- unless the company is in financial difficulty. If such financial problems result in bankruptcy, those with RCPS shares get paid before the common shareholders get any money, but after creditors and bondholders.
Assessing Redeemable Stock
Companies issue redeemable preferred stock if they issue preferred shares that pay high dividends but they want to be able to cancel the RCPS shares in the future. The stock can be redeemable at a fixed date or upon an expected event, such as the death of the owner. When you invest in redeemable preferred stock, the company may send you a check and cancel your redeemable convertible preference shares when the specified event happens, or you may be able to plan for the redemption if the date is fixed. The redeemable feature adds a risk that you may have to look for another investment when the situation is not favorable.
Understanding Convertible Stock
Since their dividends are fixed, preferred shares don't go up in value as much as common shares when companies do well. To make their RCPS shares more attractive to investors, companies sometimes add convertibility. This means that, when you buy convertible preferred shares, you have the option to convert them into a specified number of common shares if the common shares rise in value. This feature is attractive if you want initial low risk but a higher return if company performance is better than expected.
Bert Markgraf is a freelance writer with a strong science and engineering background. He started writing technical papers while working as an engineer in the 1980s. More recently, after starting his own business in IT, he helped organize an online community for which he wrote and edited articles as managing editor, business and economics. He holds a Bachelor of Science degree from McGill University.