Preferred Redeemable Increased Dividend Equity Security (PRIDES)

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 backer's underlying security and an interest-bearing deposit at a specific cost. Interest payments are made at customary spans, and conversion into the underlying security is mandatory at maturity. PRIDES were first presented by Merrill Lynch and Co.

Figuring out Preferred Redeemable Increased Dividend Equity Security (PRIDES)

PRIDES are like mandatory convertible securities yet have an alternate structure. They are comparable 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 giving stock, yet doing so would possibly put a burden on the price of current shares.

PRIDES permit investors to earn stable cash flows while as yet participating in the capital gains of an underlying stock. This is conceivable on the grounds that these products are valued similarly as the underlying security.

However there are differences in mandatory convertibles and their underlying structures, there are common elements of which PRIDES likewise share:

1. The mandatory conversion to equity once the convertible develops.
2. An appreciation cap or limit, rather than common stock.
3. The dividend yield is normally higher than that of common stock. Also, numerous mandatory convertible securities have tax advantages.

PRIDES are considered a preferred stock since they have priority over common stock and carry rights past those of common stock. For instance, owners of preferred shares might enjoy a benefit should a company file bankruptcy or liquidate.

Preferred stocks can be issued by a company of any size, and they have qualities of both equity and debt. Holders of PRIDES don't have voting rights, though holders of common stock generally vote on many issues. Notwithstanding, holders of PRIDES frequently receive a considerably higher dividend than common shareholders, which is a huge advantage.

Features

• PRIDES permit investors to earn stable cash flows while as yet participating in the capital gains of an underlying stock.
• They are like mandatory convertible securities in that the preferred share must be converted into common stock by a certain date.
• Preferred Redeemable Increased Dividend Equity Securities (PRIDES) are synthetic securities consisting of a forward contract to purchase the backer's underlying security and an interest-bearing deposit at a specific cost.
• PRIDES were first presented by Merrill Lynch and Co.
• PRIDES are considered a preferred stock since they have priority over common stock and carry rights past those of common stock.