Loading the player...

DEFINITION of 'Common Stock Equivalent'

Common stock equivalent refers to securities 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 stock holders 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 equivalent 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 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 Earnings Per Share (or Diluted EPS) is a performance ...
  2. Fully Diluted Shares

    The total number of shares that would be outstanding if all possible ...
  3. Deferred Equity

    Deferred equity is a security, such as preferred shares or convertible ...
  4. Market Conversion Price

    An investor's effective cost to purchase common stock when it ...
  5. Contingent Convertibles - CoCos

    A security similar to a traditional convertible bond in that ...
  6. Mandatory Convertible

    A mandatory convertible is a type of convertible bond that has ...
Related Articles
  1. Investing

    Introduction to Convertible Preferred Shares

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

    The Dangers of Share Dilution

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

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  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

    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.
  6. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  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. Managing Wealth

    Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
RELATED FAQS
  1. What is dilutive stock?

    Dilutive stock is any security that dilutes the ownership percentage of current shareholders - that is, any security that ... Read Answer >>
  2. What's the difference between the equity market and the stock market?

    Learn about the difference between the equity market and the stock market, and how the terms equity market and stock market ... Read Answer >>
  3. Can anyone own common stock in a company?

    Understand who can purchase common stock as well as the key characteristics that differentiate common stock from preferred ... Read Answer >>
  4. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center