A stock can have either equity or debt (bond) characteristics. However, there are certain stocks which combine features of both, and they are known as hybrid stocks. While these stocks offer higher returns than pure debt instruments like bonds, they are lower than equities. Read on to know the various aspects of a hybrid stock.
Types of hybrid stocks
The different types of hybrid stocks are:
1. Convertible bond
This is a kind of hybrid stock which gives you, the investor, a bond with the flexibility to convert it into stocks of the same company. Because of its nature as a bond along with the power to convert it into equity stock makes convertible bond a hybrid stock.They are in high demand because not only they offer regular income but allow investors to convert them into shares of the company whenever needed.
2. Preferred stocks
Equipped with features of both equity and debt, preferred stocks offer dividends. While preferred stockholders don’t have voting rights, enjoyed by common stockholders, in case the company goes into liquidation, these stockholders get preference over the common ones, when it comes to receiving dividends.
A kind of hybrid stock, warrants give investors the right to buy and sell shares at a particular price on or before a certain date. However, investors are not obliged to do so. Warrants are generally cheaper, which means that you can buy more number of shares with less money.
Advantages of investing in hybrid stocks
- Helps you gain from the features of equities and debt
Investing in hybrid stocks help you gain from both equities and debt. While equities help you generate inflation-adjusted returns in the long run, debt prevents the erosion of corpus in case the market nosedives or turns sour.
- Easy diversification
This is another major benefit of investing in a hybrid stock. As these stocks invest in a mix of equities and debt, they help you diversify your portfolio. While the equity portion cashes in when the markets are doing great, the debt part comes handy during market downturns.
Should you opt for hybrid stocks?
Because of their potential to balance risk and returns, hybrid stocks make for an ideal investment choice. Also, for investors who like to adopt the wait and watch approach, hybrid stocks are an ideal bet. However, before selecting it, it’s essential to learn about the stock’s past performance and returns across market cycles. At the same time, it’s important to study about company fundamentals and see whether the equity-debt proportion suits your needs or not.
As new hybrid stocks are being introduced every day, it’s essential for investors to adopt due diligence and understand whether the stock has the features that can help them meet their goals.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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