Preferred Redeemable Increased Dividend Equity Security (PRIDES)
Preferred Redeemable Increased Dividend Equity Securities, or PRIDES, are synthetic securities consisting of a forward contract to purchase the issuer's underlying security and an interest-bearing deposit for a specific price. Though there are differences in mandatory convertibles and their underlying structures, there are common features of which PRIDES also share: 1. The mandatory conversion to equity once the convertible matures. 2. An appreciation cap or limit, as opposed to common stock. 3. The dividend yield is typically higher than that of common stock. PRIDES are considered a preferred stock because they have priority over common stock and carry rights beyond those of common stock. PRIDES are considered a preferred stock because they have priority over common stock and carry rights beyond those of common stock. Preferred Redeemable Increased Dividend Equity Securities, or PRIDES, are synthetic securities consisting of a forward contract to purchase the issuer's underlying security and an interest-bearing deposit for a specific price.
What Are Preferred Redeemable Increased Dividend Equity Securities (PRIDES)?
Preferred Redeemable Increased Dividend Equity Securities, or PRIDES, are synthetic securities consisting of a forward contract to purchase the issuer's underlying security and an interest-bearing deposit for a specific price. Interest payments are made at regular intervals, and conversion into the underlying security is mandatory at maturity. PRIDES were first introduced by Merrill Lynch & Co.
Understanding Preferred Redeemable Increased Dividend Equity Security (PRIDES)
PRIDES are similar to mandatory convertible securities but have a different structure. They are similar in that the preferred share must be converted into common stock by a certain date. A publicly traded company issues convertible securities when it needs to raise capital by issuing stock, but doing so would potentially put a strain on the price of current shares.
PRIDES allow investors to earn stable cash flows while still participating in the capital gains of an underlying stock. This is possible because these products are valued along the same lines as the underlying security.
Though there are differences in mandatory convertibles and their underlying structures, there are common features of which PRIDES also share:
- The mandatory conversion to equity once the convertible matures.
- An appreciation cap or limit, as opposed to common stock.
- The dividend yield is typically higher than that of common stock. Additionally, many mandatory convertible securities have tax advantages.
PRIDES are considered a preferred stock because they have priority over common stock and carry rights beyond those of common stock. For example, owners of preferred shares may have an advantage should a company file bankruptcy or liquidate.
Preferred stocks can be issued by a company of any size, and they have characteristics of both equity and debt. Holders of PRIDES do not have voting rights, whereas holders of common stock generally vote on many issues. However, holders of PRIDES often receive a considerably higher dividend than common shareholders, which is a significant advantage.
Related terms:
Common Stock
Common stock is a security that represents ownership in a corporation. 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
Debt
Debt is an amount of money borrowed by one party from another, often for making large purchases that they could not afford under normal circumstances. read more
Debt Exchangeable for Common Stock (DECS)
Debt exchangeable for common stock (DECS) is a convertible security allowing an investor to convert debt into common stock. read more
Dividend Enhanced Convertible Stock (DECS)
Dividend Enhanced Convertible Stock (DECS) is a preferred stock that provides holders with premium dividends. read more
Equity : Formula, Calculation, & Examples
Equity typically refers to shareholders' equity, which represents the residual value to shareholders after debts and liabilities have been settled. read more
Forward Contract
A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. read more
Liquid Yield Option Note (LYON)
A liquid yield option note (LYON) is a form of zero-coupon convertible bond that can be converted to common stock by either the holder or issuer. read more
Mandatory Convertible
A mandatory convertible is a type of convertible bond that has a required conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory convertible into the underlying common stock. read more
Preference Equity Redemption Cumulative Stock (PERCS)
Preference Equity Redemption Cumulative Stock (PERCS) is an equity derivative that automatically converts to preferred stock at maturity. read more