Convertible bonds, like most investments, carry a risk of loss. A convertible bond is a bond that the holder can convert to a share of a company's equity at certain periods during the bond duration. The amount is predetermined.

As with any investment, careful planning and research are the keys to making money from the convertible bonds. Consider the following convertible bonds basics before you invest your money:

1. Understand the purpose and function of convertible bonds.

2. Know the terms commonly used with convertible bonds.

3. Research the best times to purchase convertible bonds.

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Know the basics of convertible bond trading

There are numerous risks and benefits of convertible bond trading. For example, a convertible bond is to have a built-in stock option. This can work to the investor's benefit. It is important to note that convertible bonds may have a lesser value than traditional stocks or bonds.

I recommend: Investopedia offers a basic explanation of a convertible bond. You can also find explanations of common convertible bond fund terms on this website. The Securities and Exchange Commission provides detailed convertible bond information, including how convertible bonds work and the possible risks associated with these bonds.

Learn the terminology of convertible bonds

As with any investment, there are certain terms with which you must familiarize yourself when you buy convertible bonds. For example, reverse convertible bonds are bonds in which the issuer can convert the bonds to debt, cash or other assets at its sole discretion. A coupon is the interest amount on the bond, usually paid semi-annually, but can be on almost any payment schedule.

I recommend: Numa Financial Systems offers detailed explanations about convertible bond terms, including terms used in convertible bond calculators. Investors.com offers easy to understand definitions to common financial and investing terms.

Choose the most appropriate time to buy convertable bonds

Convertable bonds are a good alternative to traditional stocks at times when the stock market is faring poorly. It is important to note that the convertable bonds in which you invest should be with stable companies or companies with a verifiable and positive growth potential for the length of the bond.

I recommend: Wellelsey Investment Advisors offers insight into how to choose the most appropriate time to invest in convertible bonds. This website also offers a wealth of other financial tips. You can find an in depth article about how to choose the best time to invest in convertible bonds at USA Today.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Before forking over any of your hard earned cash, make sure you get convertible bonds analysis done to ensure your money is safe and your investment is protected.

Convertible bonds represent a predetermined number of shares in the company issuing the bond. When first purchased, they act like a regular corporate bond but yield a lower interest rate. Convertible bonds have no conversion when a company’s stock performs poorly, leaving investors stuck with a sub-par bond return. Reverse convertible bonds can be converted into cash, debt or equity. If sold before their maturity date, they yield a higher gain.

Convertible bond pricing affects the convertible bond listing—the conversion ratio determines the number of shares each bond can convert. The more movement your convertible bond has, the more volatile it becomes. Convertible bond analysis follows the underlying price of the company’s stock. You can view convertible bond quotes online and in financial journals.

1. Find convertible bond information on any financial investing website. Fidelity has an inventory of over 10,000 securities.

2. A convertible bond fund offers less risk than other investment options. Convertible bond funds are a long-term, interest-bearing investment.

3. States and local governments offer fixed-income convertible bonds. They come in the form of municipal bonds and help finance special community projects.

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Find a convertible bond that's right for you

Convertible bond trading is a hedging strategy. Convertible bond purchasing protects a buyer's investment. Hedge funds may be viewed as high-risk investments, but convertible bonds have low risk.

I recommend: Bondsearch123.com focuses on helping investors find the right bond for their investment needs. You can sign up for electronic newsletters on a variety of investment websites. Dailywealth.com is an electronic newsletter with investment suggestions and portfolio mapping.

Evaluate convertible bonds

The relationship between the conversion value and the investment value is how you evaluate the risk of a convertible bond. The company's stock price and its effect on the convertible bond value are important to find out before you invest in the bond. When the stock price of a company rises, so does the value of the convertible bond, and the opposite is also true: a fall in price is a fall in the convertible bond's value. When the common stock of a company falls in value, the convertible bond keeps its market value.

I recommend: Calamos Financial Services is an investment firm that specializes in building wealth through managed-risk investing. Managed-risk investing creates a balanced portfolio. Convertible bonds are a high-yield, low- to medium-risk investment opportunity available through Ameriprise Financial.

Learn the language of investing and how to update your portfolio with a convertible bond calculator

Many good investment websites assume you know what you want and how to get it. The problem is that many online investors are novices and don't know or understand the vocabulary of investing. Once you learn the terms, you need to learn how to calculate the value of your investments. Building a diversified portfolio is a long-term commitment in your future.

I recommend: A convertible bond calculator, like the one on Numa Web, can help you determine the par semiannual and annual values of your bond. Investorwords.com explains the terms used in investing to those who are less experienced.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  The rule of thumb is to invest 10% of your income. Solid portfolios have diversified investments so that you can minimize your risk and generate long-term gain.
• •  If an investment is so risky that you can't relax, then it's not the right investment for you. Convertible bond trading can provide investment opportunities that will let you sleep at night.
• •  Know the amount of commission and fees that your financial investor charges. Don't be afraid to negotiate; remember, it's your money. Most financial products are set up so that the financial advisor's commission and fees can be negotiable.

A convertible bond is issued as hybrid security. This means that for the holder, convertible bonds are similar to equity or debt holdings. The holder of convertible bonds has the ability to convert the bond into stock from the company that issues it. The issuer gets reduced interest payments, while the holder gets a discount on the price of common stock converted from the bond.

Both issuers and holders of traditional and reverse convertible bonds should understand how this may or may not be a profitable asset in certain situations. Before buying or selling convertible bond listings, a company should know:

1. The convertible bond fund types.

2. The structure and functions of a convertible bond.

3. The way convertible bond pricing is valued in a specific market.

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Explore convertible bond information that provides different convertible bond types and valuation

As you pursue convertible bonds education and training, you must first understand the different types of convertible bonds and their pros and cons. Every type of bond has a risk for both the issuer and the holder, but some types work well in different markets or with different companies. Valuation is also vital to understanding whether these bonds are a good investment or not.

I recommend: This Matter provides information on the basics of convertible bonds and valuation information that can help you determine what type of market is best for these investments. San Jose State University provides a quick look on how the valuation of these bonds work, complete with examples.

Learn the structure of a bond before choosing to buy convertible bonds

Because there are so many types of bonds on the market, a company looking to buy or sell convertible bonds should be very familiar with the structure. These bonds provide low interest payments and options that allow you to convert your investment to common stock. They do not necessarily hold potential for huge payoffs.

I recommend: My Stock Market Power provides detailed information on the structure of convertible bonds and the benefits for both parties. Investopedia can also give you the information you need to learn how a convertible bond is created, bought and converted to common stock.

Take training courses to learn convertible bonds analysis

Whether you are a company looking to sell convertible bonds or a company that is willing to invest in them, there are training courses that cover both angles. They will teach you the pros and cons of bonds, what type of investor should be seek these bonds, and how much money holders can make.

I recommend: New York Institute of Finance provides training courses on how convertible bonds are structured, the advantages of selling them, and how these bonds can affect the markets. CIFT offers an e-learning course that teaches about convertible bonds as an investment, and the overall impact of these bonds on world markets.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Just like any other investment, convertible bond trading can be a big risk if you have not done significant research on the company you are buying convertible bonds from.

People looking for a flexible way to invest in a company should consider convertible bonds. Like traditional corporate bonds, convertible bonds are a relatively low-risk kind of investment, yielding a small return at a fixed interest rate. Unlike corporate bonds, however, you can trade in convertible bonds for shares of the issuing company's stock. This gives investors the chance to capitalize on rising stock prices, although it does expose them to more risk.

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Call date

The call date is the date on which you can redeem a convertible bond before it matures. This is also the earliest time the issuer can force the holder to convert the bond into stock.

I recommend: Raymond James & Associates explains the basics of convertible bonds and gives advice regarding call dates on its website.

Forced conversion

If a company's stock price rises above that of the convertible bond's redemption value, it may force the bond holders to convert their bonds into shares. This is one down-side to investing in convertible bonds.

I recommend: Investopedia ULC outlines the dangers of forced conversion in its introductory guide to convertible bonds.

Conversion ratio

The number of shares investors can receive for each convertible bond is the conversion ratio. Both the par price of the bond and the conversion price of the stock determine the ratio.

I recommend: For a brief look at how the conversion ratio affects convertible bonds, visit MySymp.com.

Conversion parity price

The amount an investor pays for stock after buying and then converting a convertible bond is the conversion parity price, also known as the market conversion price.

I recommend: Learn more about conversion parity price and how it affects convertible bonds at InvestorWords.com.

Yield

Yield is the interest earned by convertible bonds. It's just like the yield on regular bonds, except it may end before the bond's maturity date, if the issuing company calls the bonds.

I recommend: Get tips on valuing convertible bond yields from TheStreet.com.

Capital appreciation

Capital appreciation is an increase in a stock's value based on a rise in its market price. For convertible bonds, capital appreciation is not unlimited--a forced conversion can cap it, which makes the bonds less likely to yield huge gains than regular stocks.

I recommend: Visit The Motley Fool, which discusses the role of capital appreciation in the stock market after the financial crisis of 2008.