3 Popular Hybrid Securities

Hybrid securities are securities that share the characteristics of equity financing and debt financing. While stocks are known as a type of equity financing and bonds are known as a type of debt financing, hybrid securities feature both. There are several hybrid securities that are available to investors. Here are some of the most popular types of hybrid securities on the market.

1. Convertible Preferred Shares

One of the most popular types of hybrid securities is the convertible preferred share. This is a type of preferred stock that gives you the ability to convert it into common stock at some point in the future. Many businesses like to invest in preferred stock because it has tax advantages over investing in a bond. With preferred shares, you will receive regular dividends from the company that issued the stock.

Companies can exclude up to 70 percent of the dividends that they receive from their corporate taxes. By comparison, if they were to receive interest payments from a bond, they would have to pay taxes on the full amount of money that they receive. With this type of security, the investor has the option to convert into common stock. This means that if the company is growing rapidly in value, the investor can take advantage of this growth with common stock. She will not have to sit by and just keep receiving dividends.

2. Convertible Bonds

Another type of hybrid security is a convertible bond. When an investor purchases this type of bond, he can convert the bond into common stock at some point in the future. Generally, he will receive a specific number of shares of common stock for each bond that he owns. This type of investment really gives the investor the best of both worlds. At the beginning of the investment, he can be content to receive regular interest payments from the bond.

Then, after a certain amount of time, if he wants to speculate on the capital growth of the business, he can convert the bond into a number of shares of common stock. Then if the stock increases rapidly in value, he might be able to increase his return on investment substantially. This type of bond is also helpful to companies because they sometimes do not have to repay the bond principal when people convert over to stock.

3. Mezzanine Financing

Mezzanine financing is a type of lending that investors and lenders will often get involved with. With this type of lending, the lender can take over a certain amount of ownership in a company if that company fails to repay its debt. If a company borrows a certain amount of money and decides that they do not want to repay the debt, they could instead concede a certain percentage of ownership to the lender. Investors like to get involved with this type of lending because it allows them to get involved with growing companies for a relatively small investment. 

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