Imagine an investment that offers you a minimum return known in advance, while allowing you to boost your gains if the stock markets rise, with the added bonus of the virtual guarantee of recovering your capital on the maturity date. Unimaginable? On the contrary, such a financial product exists: these are bonds convertible into shares (OCA).
These supports are currently gaining in attractiveness, for two reasons. First of all, the European Central Bank’s interest rate cuts, current and future, will promote the valuation of the bond market. Then, the ensuing resumption of economic growth should boost the stock markets.
This product is based on a fixed rate bond – a debt – issued by a company. The latter undertakes to repay the capital invested on a date known in advance and, in the meantime, to pay interest regularly.
An evolution modeled on the health of the issuer
Just like stocks, bonds are listed and their price fluctuates depending on the remuneration of other bonds issued. If yours offers an annual return of 4% and new securities arriving on the market offer lower rates, your investment will see its price increase, and vice versa. It can also change depending on the financial health of the borrowing company. If the latter goes bankrupt, it will not be able to repay the borrowed capital and the bond will no longer be worth anything!
But the particularity of the convertible lies in the existence of an additional option: that of being able to exchange your share of the bond for a predefined number of shares of the issuing company. As a result, if the markets are doing well and the company’s share price skyrockets, the option will automatically increase in value, boosting the price of your OCA. It will then be appropriate to resell it to pocket the capital gain, or to exchange it for shares if you think that the stock’s upside potential can continue over time.
“This market is not easy to access for a small saver because the entry fee is high, on average between 10,000 and 100,000 euros per security,” underlines Franck Languillat, general manager of Financière de la Cité. The solution is to invest in convertible bond funds. At European level, there are around fifty that can be stored in your securities account, with management fees of around 0.75% of the capital invested per year. Bring in the competition because the entry fees charged can vary significantly from one banking establishment to another.