DEFINITION of 'Exchangeable Security'

An investment instrument that grants its holder the right to trade it at some point in the future for a fixed number of shares of common stock of a firm, other than the issuer. An exchangeable security is one that is redeemable for the securities of another issuer, such as a subsidiary or affiliate of the issuer. The exchange may be at the option of the issuer or at the option of the holder of the security.

BREAKING DOWN 'Exchangeable Security'

Exchangeable securities are often issued by corporations that are involved in a takeover. The acquiring company wished to purchase the target company, but may need money to advance the transaction. The acquiring company can sell an exchangeable security, giving the owner of the exchangeable security the right to a specified number of shares in the target company after a specified date. If the transaction (acquisition) is successful, the exchangeable security can be traded for shares of the target company.

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