Loading the player...

DEFINITION of 'Common Stock Equivalent'

A common stock equivalent is a security – such as stock options, warrants, convertible bonds, preferred bonds, two-class common stock and contingent shares – that can be converted into common stock. Sometimes preferred stock can also be converted to common stock.

BREAKING DOWN 'Common Stock Equivalent'

Also called common shares or ordinary shares, common stock is what most individuals buy when they invest in a stock. It typically gives them the right to vote on corporate issues in proportion to their ownership in the company and the right to receive dividend payments. Common stock may be subdivided into class A shares and class B shares, which can have different voting and dividend rights. The other type of stock is called preferred stock, and its holders receive priority over common stockholders when dividends are paid and in the event the company liquidates.

How Common Stock Equivalents Are Converted

Common stock equivalents, depending on their nature, are typically converted or exercised when a certain exercise price has been met or exceeded on the market. The terms are typically set when the security is issued. As long as the market price has been met, the security will be on a par with common stock and can be converted without a loss.

Common stock equivalents are comparable to potentially dilute securities, which can act to dilute current shareholders ownership. A company must show in its income statement its diluted earnings per share and base earnings per share if there are different forms of stock available, which includes the securities that result from common stock equivalents.

There are a variety of ways that common stock equivalents can be introduced. For instance, employee stock option plans may be offered to workers as job incentives and augments to their salaries. Such programs allow employees to receive options or warrants, or can purchase securities at a discounted rate that they can later convert, usually after a specified vesting period. Typically, they must wait one year from when the securities are granted before they may exercise their options and convert them to common stock. There might also be stipulations that another full year must pass from the date they are exercised before the employee may then sell those securities.

Other forms of common stock equivalent can come with their own rules governing when and how they may be exchanged, such as converting bonds into shares. The stipulations may give the company more time to build up their assets through the funds used to purchase such securities before they are converted into common stock.

RELATED TERMS
  1. Diluted Earnings Per Share - Diluted ...

    Diluted EPS is a performance metric used to assess a company's ...
  2. Debt Exchangeable for Common Stock ...

    Debt exchangeable for common stock (DECS) is a convertible security ...
  3. Convertibles

    Convertibles are securities, such as bonds, that can be turned ...
  4. Market Conversion Price

    The cost of converting a convertible security into a common stock, ...
  5. Convertible Preferred Stock

    Convertible preferred stock includes an option for the holder ...
  6. Yield Advantage

    Yield advantage is the additional yield an investor can earn ...
Related Articles
  1. Managing Wealth

    The Mandatory Convertible: A "Must Have" For Your Portfolio?

    Mandatory convertibles are a little understood security with some distinct advantages. Find out if they are right for you.
  2. Investing

    Introduction to Convertible Preferred Shares

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

    The Dangers of Share Dilution

    Investors need to be aware of dilutive securities and how they can affect existing shareholders.
  4. Investing

    The Top 6 Convertible Bond Funds for 2016

    Take a look at convertible bond mutual funds that are well-positioned heading into 2016, and why investors might consider a convertible fund portfolio.
  5. Investing

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  6. Investing

    Can a Bond ETF Work in a Rising Rate Environment?

    The CWB Convertible Securities ETF could be the perfect solution for a rising rate environment.
  7. Managing Wealth

    What You Need To Know About Preferred Stock

    Curious about preferred shares? Here's what you should know about these bond-like instruments.
  8. Investing

    Understanding Preferred Stocks

    Companies choose preferred stock for many reasons some being the flexibility of payments and easier to market. Learn the pros and cons of preferred stocks.
  9. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
  10. Investing

    Dow Converts Preferred Stock to Common Stock (DOW)

    Dow Chemical CEO Andrew Liveris said Friday's conversion of preferred stock into common stock highlighted the strength of the company's business model.
RELATED FAQS
  1. How Do Fully Diluted Shares Affect Earnings?

    Learn how fully diluted shares affect EPS calculations and perceived value. Read Answer >>
  2. What is stock dilution?

    Stock dilution occurs when company actions reduce the ownership percentage of current shareholders. Find out how ownership ... Read Answer >>
  3. Where Does Stock From Convertible Bonds Come From?

    Convertible bonds are considered a combination of debt and equity. Find out how a debt instrument converts into shares of ... Read Answer >>
  4. What are 'death spiral' convertible bonds?

    Conventional convertible bonds give the bondholder the right to exchange the bond for a certain amount of the issuer's common ... Read Answer >>
  5. Earnings Per Share (EPS) Versus Diluted EPS

    Is EPS worth more than Diluted EPS? Learn about EPS vs diluted EPS, how they are calculated, and the difference between the ... Read Answer >>
Trading Center