Understanding Stock Conversion Prices: A Guide for Investors

If you are planning on getting involved in the stock market, you will want to understand what the conversion price of a stock is. Here are the basics of the conversion price and what it means to you as an investor.

Conversion Price

There are a few types of investments that can be converted to another type of security. Corporate bonds and preferred shares of stock will commonly have the ability to be converted into common stock. When a security has this feature, the conversion price tells you at what price you will be able to convert the security over. For example, when dealing with preferred stock, the common stock has to be at a certain price before you can convert your shares over to it.

Impact

Typically, companies are going to set the conversion price at a substantially higher mark from where it is currently priced. This way, investors will only consider converting into common stock if it is a desirable proposition for them. The conversion price is necessary in order to determine how many shares of common stock will be awarded to the owner of the preferred stock or corporate bonds. With the conversion price, they can easily calculate how many shares they will get.