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Do Hybrid Securities Belong in Your Portfolio?

Hybrid securities are becoming increasingly common, but weigh your options before you decide to invest.

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This story appears in the September 2006 issue of Entrepreneur. Subscribe »

Hybrids are surging in popularity these days, but the attraction has nothing to do with high gas prices. Hybrid securities, not hybrid cars, are what we're talking about. It's worth noting that the reasons for the spike have everything to do with what's good for the offering institutions and little to do with what's good for individual investors. But hybrids have legitimate uses for savvy investors.

Hybrid investments are part equity and part debt, and can take many forms. The most common type is a bond that can be converted into stock, known as a convertible bond. Hybrids are an increasingly cheap way for companies to raise money. Changes by the Federal Reserve and the credit rating services last year gave companies new incentives, allowing them to count hybrids differently for regulatory and credit-rating purposes. So corporate America rushed to make 2006 the year of the hybrid.

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