Putable Common Stock

Posted in Finance, Accounting and Economics Terms, Total Reads: 516
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Definition: Putable Common Stock

It refers to those stocks which are purchased by investors and give it the right to sell it to the company at a predetermined price to before a specific date. The put option prevents the company against any downside while at the same time company gets to raise the capital in case of an emergency.

 

The put option price is set low enough to attract the investors initially and the put option also acts as an insurance for investors in case of any downslide in the price of the stock. Once the period of buying back expires, the put option becomes invalid and it trades like any other normal stock.

 

Putable shares often find great interests among investors and they trade at a premium to other shares due to the inherent protection clause in them. The premium disappears if the stock is trading at above the put option price. Thus, putable shares are a combination of stocks and derivatives.

 

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