Common Stock Equivalent

What Is a Common Stock Equivalent?

A common stock equivalent is a security — like stock options, warrants, convertible bonds, preferred bonds, two-class common stock, and contingent shares — that can be changed over into common stock. In some cases preferred stock can likewise be changed over completely to common stock.

Figuring out a Common Stock Equivalent

Likewise called common shares or ordinary shares, common stock is what most people buy when they invest in a stock. It normally gives them the right to vote on corporate issues in relation to their ownership in the company and the right to receive dividend payments.

Common stock might be partitioned into class A shares and class B shares, which can have different voting and dividend rights. The other type of stock is called preferred stock, and its holders receive priority over common stockholders when dividends are paid and in the event the company liquidates.

How Common Stock Equivalents Are Converted

Contingent upon their inclination, common stock equivalents are regularly changed over or exercised when a certain exercise price has been met or surpassed on the market. The terms are commonly set when the security is issued. However long the market price has been met, the security will be on a par with common stock and can be changed over without a loss.

Common stock equivalents are comparable to the potential weakening of securities, which can weaken current shareholders' ownership. A company must show on its income statement its diluted earnings per share and base earnings per share assuming there are various forms of stock accessible, which incorporates the securities that outcome from common stock equivalents.

There are various ways that common stock equivalents can be presented. For example, employee stock option plans might be offered to workers as job incentives and increments to their salaries. Such programs permit employees to receive options or warrants or purchase securities at a discounted rate that they can later change over, for the most part after a predetermined vesting period. Regularly, they must stand by one year from when the securities are allowed before they might exercise their options and convert them to common stock. There could likewise be limitations that another full year must pass from the date they are exercised before the employee may then sell those securities.

Different forms of common stock equivalent can accompany their own rules overseeing when and how they might be traded, for example, changing over bonds into shares. The expectations might give the company additional opportunity to build up their assets through the funds used to purchase such securities before they are changed over into common stock.

Features

• A common stock equivalent is a security that can be changed over into common stock.
• Common stock equivalents are much of the time presented in employee stock option plans or while changing over bonds into shares.
• The terms for conversion are regularly set when the security is issued.
• Common stock equivalents are regularly changed over or exercised when a certain exercise price has been met or surpassed on the market.
• When the market price is met, the security is on a par with common stock and can be changed over without a loss.