What are Conversions? Corporate Actions Explained
There are two types of shares that are commonly converted, convertible loan stocks (debt) and convertible preference shares (equity). Sometimes conversions may be called exchanges. There are also two different types of conversions, optional and mandatory:
The are when shareholders are given the option to convert their current holdings into new shares (or bonds) created in another line of the company’s stock. The shareholder should not be penalised if they do not convert, however future market conditions could in hindsight make their decision to convert, or not to, appear to have been in poor judgment.
Some conversions are simply an opportunity to change the your holding to a different market listing, e.g. from the GBP shares to EUR shares, or USD to CAD. Others maybe part of a company restructure, where they give you the option to convert into a new line of stock, or receive compensation in another form, usually cash.
A conversion will not affect your ISA entitlement, as you are not investing any additional income into the fund, however if the conversion is for a stock that you cannot hold, such as a foreign listing, then you will not have the option available to you.
These are simply when a company decides they want to convert some or all outstanding convertible shares. If over 75% of a convertible class of share have already been converted, the company if they wish can compulsory convert the remaining 25% of the shares in issue.
Convertible Loan Stock (debt)
Fixed interest securities offer no protection from inflation but are safer investment than ordinary shares with fixed interest payments. Convertible loan stocks enable the holder the option of holding onto fixed interest stocks or being able to convert into the more risky but potentially higher rewarding equities. Convertible loan stocks are used by both income and growth investors.
Conversion of these types of stocks happen at fixed dates which is normally on an interest payment date.