Hybrid Securities in Basic Terms, Hybrid Securities

Hybrid Securities In basic terms, hybrid securities have features that easily distinguish them from other kinds of securities. In their most basic form, they have characteristics of both equity and debt. For this reason, they cannot be classified as either debt or equity. The three hybrid securities I concern myself with below are convertibles, warrants, and preferred stock. Preferred Stock In the words of Carey and Essayyad (2001), "preferred stock is a security which pays fixed dividends" (p.89).

When seeking to raise capital for growth or expansion, companies can issue two kinds of stock, i.e. common and preferred stock. As is the case with common stock, investors who buy preferred stock provide the company with money in exchange for the corporation's shares. For this reason, preferred stock can be likened to equity. It is however important to note that preferred stock could in some instances be likened to bonds. This is particularly the case given that they pay a regular dividend.

Unlike common stock which does not guarantee investors a regular stream of income, preferred stock could be seen as a fixed income-security. In the event of liquidation, preferred stockholders have a claim on the assets of an entity before common stockholders (but after holders of corporate bonds) and for this reason, many view preferred stock as being safer than common stock (Carey and Essayyad, 2001). Companies could use preferred stock as a way of regulating control of the business.

This is particularly the case given that holders of this kind of stock lack voting rights. Warrants In basic terms, "a warrant is a security that allows the holder to subscribe to another newly issues security (share, bond, or even another warrant) during a given period, in a proportion and at a price fixed in advance" (Vernimmen et al. 2011, p.461).

Should the price of the security rise above the said fixed price, then the holder of the warranty can purchase the same security at the price fixed in advance and offer it for sale at the prevailing market price. In most instances, companies offer warrants alongside other securities and for this reason, Carey and Essayyad (2001) point out that they are viewed as "sweeteners" in corporate financing. This is more so the case given that they "enhance the marketability of the accompanying low-interest fixed income securities" (Carey and Essayyad 2001, p.91).

A warrant's lifetime is in most cases measured in years. Convertibles In basic terms, convertible securities according to Carey and Essayyad (2001) offer those who invest in them a number of fixed-income security advantages while at the same time offering the said investors an opportunity to benefit from changes in stock price. Convertible bonds - yet another hybrid security that has features similar to those of an ordinary bond -remain the most popular convertible securities. Another equally popular convertible is convertible preferred stock.

With regard to convertible preferred stock, holders of the said stocks can elect to convert them into common stock. When it comes to convertible bonds, investors have the option of cashing out on maturity or converting the said bond to company stock. In addition to owning a piece of the company,.