Most people know about investing in the stock market, but not a lot people know about investing in convertible bonds. Just saying the phrase itself is a mouthful, but what does it mean and why should you invest in these securities? Convertible bonds, otherwise known as junior debentures, are corporate bonds that can be exchanged when initiated by the holder for a share of the company’s preferred or common stock during bond’s term of ownership.

This type of bond can be considered as a combination of the positive features of bonds and stocks, which make it a great option for investors. If you want to know whether convertible debentures are worth investing in or not, then you’ve come to the right place. This article will explain both the benefits and drawbacks of these bonds.

An amazing feature of these bonds is its ability to give you profit even if the stock remains constant or declines. When there is a boost in the stock value, there is also a great probability that the bond value will increase. When you invest in a convertible debenture, you will enjoy the benefits of both options and earn money in both ways.

What makes these bonds better than the other types of bonds is that they ensure your security even if there is a decrease in the price of the stocks. Since these bonds are sold at premium over the cost of a stock, you can expect to gain back that premium in as short as 3 or 4 years following the bond’s purchase. Above all, an investor can expect to earn more from both interest payments and the rise in the value of the bond upon an increase in the value of the stocks.

But what’s the downside when investing in these bonds? First of all, convertible debentures are callable. The company that issued these bonds can redeem the bonds whenever they want to do so. This means that if you invested your money thinking that you would be reaping the reward in the years to come, you may be forced to reinvest it in less attractive options.

Furthermore, you won’t be able to transform bonds like these to company stock at just any time you want. You need to make sure that the price of the stock hits a specified value first, which is referred to as the conversion premium. If your objective is to own the stocks of a certain company, the best technique is to purchase them at a cheaper cost. This is better than waiting to reach the conversion premium.

Keep in mind that most companies that issue these bonds are usually having problems financially. Normally, bonds are issued by smaller sized businesses who might find it expensive to issue stock shares or even bonds. Businesses looking for funds will certainly boost their cash through issuing bonds or issuing stocks. Businesses will certainly issue convertible debentures whenever stock shares or straight bonds aren’t a possibility. You should purchase a this bond if you have high hopes about the company’s future.

There are advantages and disadvantages to investing in bonds such as these. However, it could be the perfect choice for someone. Like any kind of investment, it is best to do your homework before deciding to put your hard-earned money in convertible bonds.

The writer of this piece has located an expert by the name of Josh Yudell. Josh Yudell is the CEO of a large and well-respected investor relations firm and has run market awareness campaigns for hundreds of public companies.