Summertime, and the investing is . . . well, anything but easy. After months of record-breaking highs, the stock market's "irrational exuberance" has made many investors more cautious. And yet, who doesn't long for those starlit nights around the campfire, spinning tales of profits made and capital gains taken? Well, if you want to have your gains and protect your investments, too, you can find a measure of both credit safety and potential appreciation in convertible bonds.
Convertible bonds are hybrid securities that share characteristics of both stocks and bonds. As the name implies, these securities can be exchanged for a set number of shares of the underlying common stock, and their price tracks that of the stock on the way up. But as fixed-income securities, they pay a fixed interest rate like a regular bond. These interest payments cushion the bond's price when the stock declines, so convertible securities rarely fall as far or as fast as their common stock cousins. For some investors, convertibles provide the best of both worlds.