Common Stock Equivalent

Posted in Finance, Accounting and Economics Terms, Total Reads: 372
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Definition: Common Stock Equivalent

These refer to securities which can be converted to common stock. These include Stock Options, Warrants, Preferred bonds, Contingent Shares.

 

Let us approach them one by one

 

• Stock options:

It refers to option which gives the buyer the right (not the obligation) to buy (call option) or sell (put option) a stock at a pre-decided price within a certain period or a certain date.

Example: Employee stock options provided by employers to the employees to incentives them. The employees thus have the right to buy specified no. of shares at pre decided price.

 

• Warrants:

Issued by a firm, these give the buyer the right to buy a specified number of shares at a definite time in the future at a specific price.

 

• Preferred bonds:

It refers to the debt that has priority over other debts.

 

• Contingent shares:

As the name suggests, these refer to shares that are issued contingent on the satisfaction of certain conditions. They are important because if issued, they dilute the ownership of existing stockholders. Generally, they are issued if the firm’s earnings exceed a certain threshold.

 

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