What is an 'Installment Receipt'

An installment receipt is a debt or equity issuance in which the purchaser does not pay the full value of the issue up front. In the purchase of an installment receipt, an initial payment is made to the issuer at the time the issue closes; the remaining balance must be paid in installments, usually within a two-year period. Although the purchaser has not paid the full value of the issue, he or she is still entitled to full voting rights and dividends.

BREAKING DOWN 'Installment Receipt'

This type of debt or equity financing is most attractive to issuers that are unable to get an attractive price for more traditional financing techniques, such as a traditional initial public offering (IPO).

Installment receipts often trade on an exchange, in which case, whoever purchases them assumes liability for any installments that may remain. This type of financing is mainly seen in Canada.

Example of an Installment Receipt

For example, a company issues shares at $12 each. Rather than actually being issued a $12 share certificate, you can buy an installment receipt which requires you to make an initial payment of say $8 and the balance of $4 a year later. If the market price of those shares rises to $16, you will end up earning $4 a share, since your total cost will be $8 plus $4. On the other hand, if the market price fell to $8 a share, you would lose $4 a share. If the value of the underlying stock increases after the installment receipt is issued, that should boost the receipt's value and enable you to gain from financial leverage. You could make the initial payment on the installment receipt — representing only part of the full price of the stock — and sell that receipt later at a profit before the next, or final payment is due.

As something of a loan, an installment receipt's central function is financial leverage, although the features differ from a traditional margin account.

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