What Does a Forced Conversion Mean for Your Investment?

A forced conversion could have a serious impact on your investment portfolio. Here are the basics of a forced conversion and how it can affect you as an investor.

Forced Conversion

Many types of securities are convertible by nature. For example, there are convertible bonds that can be converted into common stock. There are also certain stocks that can be converted into other classes of stock. A forced conversion occurs when the company that issued the security forces you to convert to another form of security.

Impact on Investors

This type of conversion can have some serious impacts for investors. For example, let's say that you purchased a convertible bond three years ago. You were planning on the bond lasting for 30 years. However, you receive notice that your bond will be converted into common stock. Now instead of receiving a regular interest payment every month for the next 30 years, you have common stock. The common stock will not pay you any interest, and it will fluctuate greatly in value depending on the stock market.

When a forced conversion takes place, you will have to move on to a contingency plan. This may force you to choose an investment that was not as favorable as the one that you just had.

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