Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Callable Common Stock

What it is:

Callable common stock is an equity stake in a company where either the issuer or a third party has the right, but not the obligation, to repurchase the stock at a specific price after a certain date.

How it works (Example):

Let's assume you own 100 shares of Company XYZ callable common stock . If the stock is callable at 105% of market price and the shares are trading at $100 per share, then Company XYZ could force you to sell your shares back at $105 per share. The strike price on callable common stock often contains a premium on the prevailing market price or is calculated according to a schedule provided by the issuer at the time the shares are sold.

It is important to note the price of callable common stock is affected by whether the call option is in the money, at the money or out of the money. For example, if the stock is callable at $100 and the shares are trading very close to that (say, at $99), the likelihood that the stock will be called soon is much higher than if the stock were trading at $89 (further away from the strike price). As a result, because investors know that the issuer will probably call the shares if they trade above $100, the stock's price appreciation   is effectively capped at $100 per share.

Subsidiaries are the most frequent issuers of callable common stock, and the parent company is usually the entity that has the right to repurchase the stock.

Why it Matters:

Owners of callable common stock bear call risk, which is not often associated with stock ownership. The strike-price premium is meant to compensate the holder for some or all of this risk. Because of this additional, somewhat unusual call risk, the Financial Industry Regulatory Authority (FINRA) requires all transaction confirmations involving explicitly disclose that the security is callable.