Posted in Finance, Accounting and Economics Terms, Total Reads: 450
Definition: Callable Common Stock
Every company issues shares. Some shares have an embedded option in them, that they can be redeemed at certain specified date at a particular fixed price. This price is determined at the time of buying the share. Shares which have the embedded option that give the company the right to buy back the stock before certain specified date at a particular price is called callable common stock whereas when the option is with the buyer of the stock, then it is called putable common stock.
For example, if the investor buys a callable common stock for R100 which has exercise price of R120 and expires in 3 months. Then, the company can buy back the share within 3 months at a price of R120 irrespective of price prevailing in the market. If the price in market is greater than R120, then the investor is at loss as he sold the same share at a lower price which he could have sold at a higher price.
If the price of the share is less than R120 at the end of 3 months, then the company is at loss as it will have to pay more for the same share than it would have paid in the market.