Market Conversion Price

Market Conversion Price

The market conversion price is the amount investors pay per share when exercising their option to exchange convertible securities, typically bonds or preferred stock**,*into common stock. Because fluctuations in the convertible security's market price affect the market conversion price, convertible security holders can profit in situations where market conversion prices are lower than the current market price of those shares. The conversion ratio, which for convertible bonds can be found in the bond indenture or for convertible preferred shares in the security prospectus, will initially value the security at more than its current market value, making conversion desirable only if a company's common shares rise significantly. Assuming that the bond’s market price at the time of the conversion is $500, and its conversion ratio is 10 shares per bond, then the market conversion price for the shares would be $50 per share. It is calculated by dividing the convertible security's market price by its conversion ratio — the number of common shares a convertible security can be converted into.

The market conversion price is the amount investors pay for a share when exercising their option to exchange convertible securities into common stock.

What Is the Market Conversion Price?

The market conversion price is the amount investors pay per share when exercising their option to exchange convertible securities, typically bonds or preferred stock**,** into common stock. The market conversion price is calculated by dividing the convertible security's market price by its conversion ratio.

The market conversion price is the amount investors pay for a share when exercising their option to exchange convertible securities into common stock.
It is calculated by dividing the convertible security's market price by its conversion ratio — the number of common shares a convertible security can be converted into.
The conversion ratio will initially value the security at more than its current market value, making conversion desirable only if a company's common shares rise significantly.
Attractive conversion prices will likely motivate investors to exercise their options, diluting the value of a company's shares.

How the Market Conversion Price Works

Convertible securities are income-paying investments, usually convertible bonds or convertible preferred stock**,** issued by companies that can be later converted into common shares at the investor’s discretion.

When an investor purchases a convertible security, it will often be associated with a conversion ratio that predetermines the number of shares the investor will receive by choosing to convert the security. The conversion ratio, which for convertible bonds can be found in the bond indenture or for convertible preferred shares in the security prospectus, will initially value the security at more than its current market value, making conversion desirable only if a company's common shares rise significantly.

The conversion ratio determines how many shares of stock investors can get when converting securities. For example, a 5:1 ratio means that one bond would convert to five shares of common stock.

Ultimately, it is up to each investor to strategically determine if and when to follow through on the option to exchange their security for common stock, or to hold onto it until it reaches its full maturity. If the stock trades below the market conversion price, converting the security into common shares makes little sense. Only when the shares rise above the market conversion price is it potentially advantageous to cash in on the convertible option.

Example of a Market Conversion Price

Suppose an investor owns convertible bonds in The World’s Best Widget Company, and they decide to convert those bonds into stock shares of the company.

Assuming that the bond’s market price at the time of the conversion is $500, and its conversion ratio is 10 shares per bond, then the market conversion price for the shares would be $50 per share. This is calculated by dividing the $500 bond price, by the 10 common shares ($500/10).

Advantages of the Market Conversion Price

Convertible securities are frequently sought by investors looking for short-term fixed income, who also believe that the issuer’s price for shares of stock is likely to spike in the future. 

Because fluctuations in the convertible security's market price affect the market conversion price, convertible security holders can profit in situations where market conversion prices are lower than the current market price of those shares.

Meanwhile, from the perspective of the holding companies, the conversion prices of convertible securities help them to assess the value of their stock and determine the levels of financing that may possibly be raised down the line.

Special Considerations

The conversion price may influence the issuance of future stock shares, and affect the price of those securities. Company executives consult with various experts before determining the price. A lot of focus is placed on striking a balance between making the convertible securities appealing to potential investors, while also being fair to existing equity shareholders.

Attractive conversion prices may motivate many investors to exercise their options, although doing so could dilute the value of a company's shares, impacting existing stockholders. As a result, potential investors should always be cognizant of the convertible securities offered by companies they invest in.

Related terms:

Bond : Understanding What a Bond Is

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. read more

Cashless Conversion

Cashless conversion is the direct conversion of ownership (from one ownership type to another) of an underlying asset without any initial cash outlay. read more

Common Stock

Common stock is a security that represents ownership in a corporation.  read more

Conversion Ratio

The conversion ratio is the number of common shares received at the time of conversion for each convertible security. read more

Convertible Security

A convertible security is an investment that can be changed into another form, such as convertible preferred stock that converts to common stock.  read more

Convertible Bond

A convertible bond is a fixed-income debt security that pays interest, but can be converted into common stock or equity shares.There are several risks read more

Convertible Preferred Stock and Example

Convertible preferred stock is a hybrid security that gives holders the option to convert their preferred stock into common shares after a defined date. read more

Dilution

Dilution occurs when a company issues new stock which results in a decrease of an existing stockholder's ownership percentage of that company. read more

Dividend Enhanced Convertible Stock (DECS)

Dividend Enhanced Convertible Stock (DECS) is a preferred stock that provides holders with premium dividends. read more

Embedded Option

An embedded option is a component of a financial security that gives the issuer or the holder the right to take a specified action in the future. read more

show 13 more