Convertible Issues And Warrants

Convertible bonds and preferred stocks have taken importance in the financial markets in recent years. And stock-option warrants, which give the right to buy common shares at predetermined prices, have become more and more common. More than half the preferred issues quoted by S&P in 1970 have conversion privileges.

Convertible issues have proven to be advantageous to both the issuer and the investor. The investor receives protection from preferred stock or bonds and a chance to participate in an uprise of common stock. However, the issues on which these privileges are available of poor quality or yield or both.

During bull markets, these issues are bound to produce unsatisfactory results as a whole. It goes without saying that a convertible is less risky than the common stock of the same company.

The author suggests never to convert a convertible bond. Just because then we will lose the strategic combination of this issue and the chance to convert it at an attractive price.

People get carried away by their enthusiasm for converting an issue without doing proper due diligence and then suffer huge losses.

Generally, we can find convertible issues suitable for us in the older issues rather than the newer issues. But these instances are not easy to find.

The author considers warrants to be a mere fraud and a potential disaster. Warrants have the potential to mislead investors and speculators.

Graham also says that common stocks become less valuable with warrants attached to them. With attached warrants, common stocks become pricier and simply mislead investors who have less knowledge about the financial market.