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incentive for employees to work harder as a team. The better the
company does, the higher the stock will go, and therefore the higher the
profits from the employee stock options.
Convertible Bonds
These are bonds issued by many companies that work just like
regular bonds, but the bondholders have the option to convert the
company bonds into common shares at anytime. This is usually a win
for the company, since paying down the debt with common shares is
always cheaper than paying cash. It may also be a win for the investor,
depending on the original contract for the conversion ratio (e.g., 30
common shares for each bond note). The conversion ratio varies from
bond to bond and there may be time and price stipulations as well.
Since these bonds give the holder the conversion option, they usually
pay smaller interests than regular bonds. As the bonds are converted,
the company issues new shares to pay the investors. Issuing new shares
has the effect of diluting a company’s equity for all shareholders, which
could have a negative effect on the stock price. More supply for the
same demand means lower prices.
Closed-End Funds
These are basically a class of mutual funds that are divided into units
and traded as stocks. Just like index stocks, they can be traded the same
way as any other stock, so they offer a good way for an investor who is
more comfortable with trading stocks to get into a mutual fund. It
should be mentioned that most mutual funds are offered in the
traditional open-end format, which most of us are accustomed to. We
will cover both types in more detail in the mutual funds chapter. …
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