Preference Equity Redemption Cumulative Stock - PERCS


DEFINITION of 'Preference Equity Redemption Cumulative Stock - PERCS'

A convertible preferred stock with an enhanced dividend that is limited in term and participation. Preference equity redemption cumulative stock (PERCS) shares can be converted for shares of common stock in the underlying company at maturity. If the underlying common shares are trading below the PERCS strike price, they will be exchanged at a rate of 1:1; but if the underlying commons are trading above the PERCS strike price, common shares are exchanged only up to the value of the strike price.

BREAKING DOWN 'Preference Equity Redemption Cumulative Stock - PERCS'

PERCS are essentially a covered call option structure, and are popular in an environment of declining yields because of the enhanced dividend. Upside profits are limited in order to produce a higher yield.

For example, if you own 10 PERCS with a strike price of $50, at maturity the following could happen:

-If, at maturity, the underlying asset was trading at $40, you would receive a total of 10 common shares, worth $40 each.

-If, at maturity, the underlying asset had doubled and was trading at $100, you would receive only five shares worth $100 each. The total value of the shares ($500) exchanged equals the strike price of $50 x 10 shares.

  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Covered Call

    An options strategy whereby an investor holds a long position ...
  4. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  5. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  6. Common Stock

    A security that represents ownership in a corporation. Holders ...
Related Articles
  1. Bonds & Fixed Income

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  2. Bonds & Fixed Income

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  3. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  4. Options & Futures

    An Alternative Covered Call: Adding A Leg

    Try this approach to covered calls to increase your potential for profit in any market.
  5. Options & Futures

    The Basics Of Covered Calls

    Learn how this simple options contract can work for you, even when your stock isn't.
  6. Options & Futures

    An Alternative Covered Call Options Trading Strategy

    This different approach to the covered-call write offers less risk and greater potential profit.
  7. Options & Futures

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  8. Options & Futures

    Using LEAPS In A Covered Call Write

    Discover how strategy can help reduce your downside risk.
  9. Term

    What's Recapitalization?

    Recapitalization is the restructuring of a company’s debt and equity mixture.
  10. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  1. What is dilutive stock?

    Dilutive stock is any security that dilutes the ownership percentage of current shareholders - that is, any security that ... Read Full Answer >>
  2. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!