Deferred equity refers to an investment vehicle that allows an investor to buy ordinary shares from a company at some point in the future. Although the investor does not immediately receive shares and primary capital certificates, he or she may convert his current securities into shares at a time if the underlying stock price is moving positively in their direction. The two most common types of deferred equity are convertible bonds and convertible preference shares. In either case, these securities can be traded on the secondary market, with their prices depending on how close the current stock price is to the price at which the conversion becomes profitable.
Many investors want the opportunity to buy equity in a top company. If they do this, they will benefit if the company’s happiness improves and the equity thus becomes more valuable. Unfortunately, the cost of buying ordinary shares in established companies is often very expensive. An alternative for those investors who want to buy equity at reasonable prices is deferred equity.
The idea behind deferred equity is that investors have the opportunity to convert the security they purchased into actual common stock shares at some date in the future. This date can be determined at the beginning of the agreement or it may come when the price of the underlying stock reaches a certain price. Investors usually receive some kind of fixed income from the investment until they convert to ordinary shares, if the time actually comes.
Convertible bonds and convertible preference shares are two popular types of deferred equity. With convertible bonds, investors receive interest payments from the issuer of bonds and can convert the bonds into ordinary shares at some point. In the case of convertible preferred stock, the interest element of the investment comes from regular dividends. Preferred shares also promise investors back of capital before ordinary shareholders should the issuing company ever reach a point where it goes bankrupt or out of business.
Whichever type of deferred equity is chosen, investors must decide the point at which it becomes profitable to convert the securities into equity. When this point is reached, the safety element inverter is said to be in money. When it comes to selling these securities on the secondary market, the stock price proximity to being in money is the most important factor. As the stock price approaches money, investors may demand more of a premium.
- Deferred equity is a financial instrument that has the potential to be converted into ordinary shares.
- The two most common types of deferred equity are convertible bonds and convertible preference shares.