DEFINITION of 'Market Conversion Price'

An investor's effective cost to purchase common stock when it is purchased in the form of a convertible security and the investor then exercises the security's conversion option. The market conversion price is calculated by dividing the convertible security's market price by the convertible security's conversion ratio.

Examples of convertible securities include convertible bonds, which can be exchanged for shares of a company's stock, and convertible preferred stock, which can be exchanged for shares of common stock. Collectively, this category of investments is known as "convertibles."

BREAKING DOWN 'Market Conversion Price'

When the investor purchases the convertible security, it will often be associated with a conversion ratio that predetermines the number of shares the investor will receive by choosing to convert the security. The conversion ratio will initially value the security for more than the security's current market value, but as market conditions change, so can this relationship.

As an example, suppose an investor owns convertible bonds in The World’s Best Widget Company, and he or she decides convert those bonds into stock shares of the company. Assuming that the bond’s ratio at the time is of the conversion is $500, and its conversion ratio is 10 shares per bond, then the market conversion price for the shares would be $50 per share, achieved by dividing the $500 bond ratio, by the 10 common shares ($500/10).

Convertible securities are frequently sought by investors looking for short-term fixed income, who also believe that the issuer’s price for shares of stock is likely to spike in the future. And because fluctuations in the convertible security's market price affect the market conversion price, convertible security holders can profit in situations where market conversion prices are lower than the current market price of those shares. But it is ultimately up to each investor, to strategically determine if and when to follow through on the option to exchange his or security for common stock, or to hold onto it until it reaches its full maturity.

But while attractive conversion prices may motivate many investors to exercise their options, doing so may dilute the value of a company's shares, which is a potential downside for existing stockholders, who should therefore always be cognizant of the convertible securities offered by companies they invest in.

From the perspective of the holding companies, the conversion prices of convertible securities helps them to assess the value of their stock, and determine the levels of financing that may possibly be raised, down the line. Furthermore, the conversion price may influence the issuance of future stock shares, and affect the price of those securities.

  1. Conversion Value

    The financial worth of a convertible security – if its call option ...
  2. Convertible Security

    A convertible security is an investment that can be changed into ...
  3. Forced Conversion

    A forced conversion allows an issuing company to make a security ...
  4. Convertibles

    Convertibles are securities, such as bonds, that can be turned ...
  5. Conversion Premium

    A conversion premium is the amount by which the price of a convertible ...
  6. Conversion Parity Price

    The conversion parity price is the price paid for converting ...
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

    Convertible bonds: pros and cons for companies and investors

    Understand what effect convertible bonds have on investors and companies. Find out the advantages, disadvantages, and what the issue means from a corporate standpoint before buying in.
  3. Investing

    3 Best High-Yielding Convertible Bond Mutual Funds (LACFX, FACVX)

    LACFX,FACVX,VCVSX: Learn about three of the highest-yielding options available.
  4. 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.
  5. Investing

    CWB: SPDR Barclays Convertible Secs ETF

    Read an in-depth analysis of the SPDR Barclays Capital Convertible Bond ETF, which tracks an index of high-growth potential convertible bonds.
  6. Financial Advisor

    Why a Roth Conversion May Make Sense Now

    Converting to a Roth IRA is a simple strategy that can help weave a silver lining from an otherwise financially mediocre year.
  7. Investing

    Investment Valuation Ratios

    Learn about per share data, price/book value ratio, price/cash flow ratio, price/earnings ratio, price/sales ratio, dividend yield and the enterprise multiple.
  8. Retirement

    3 Reasons to Convert Your IRA to a Roth IRA

    Having an IRA is smart. Knowing when to convert it to a Roth IRA is smarter because it can give you and your heirs a welcome tax advantage.
  1. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
  2. How is convertible bond valuation different than traditional bond valuation?

    Read about bond valuation, particularly the differences between how a traditional bond is valued and how a convertible bond ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center