Page 187

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. …