Market Conversion Price
What it is:
The market conversion price is the price at which a convertible security is exchanged for common stock.
How it works (Example):
Convertible securities (for example, convertible bonds and convertible preferred stocks) allow holders to exchange them for shares of the issuing company's common stock. The number of shares is determined by a conversion ratio that states the number of shares the investor can receive per convertible security, for example, 10 shares per one bond.
The market conversion price is the current price of a company's common stock when received in exchange for a convertible security. The market conversion price is determined by dividing the current market price of the convertible security by the security's conversion ratio.
For example, suppose a holder wishes to convert his or her ABC convertible bond into ABC shares. The bond's value at the time of the conversion is $800, and its conversion ratio is 20 shares per bond. Therefore, the market conversion price for the shares would be $40 per share ($800/20 common shares).
Why it Matters:
Fluctuations in the convertible security's market price affect the market conversion price. Therefore, convertible security holders can profit if the market conversion price is lower than the current market price of those shares. For this reason, convertible securities are suitable for investors who are looking for short-term fixed income but also believe that the issuer's stock price may increase in the future.