What is Callable Common Stock?

by Investing School on September 24, 2010

The phrase “callable common stock” refers to a stock that will let the entity that issued it “call back” the stock, purchasing it at a previously determined price.

One of the most frequently seen instances of callable common stock occurs when stock is issued by a parent company to a subsidiary company. When issuing the callable common stock, the parent company will specifically retain the option of purchasing back those shares from the subsidiary company at a future time. They will generally exercise this option if and when it becomes a beneficial strategic move.

There is also callable common stock from a publicly traded company, which the issuing company can later purchase back from the shareholders. The actual price schedule that will be used if the issuer makes the decision to buy back the stock is not a random determination. This price is settled in advance, at the time when the stock is issued. In addition, the confirmed buy back price will generally tend to increase with time.

The benefit of callable common stock is that it lets a company have some significant flexibility in how and when it chooses to buy back shares. It also sets a specific and known price for the buy back, which means that the company can budget accurately for such purchases in advance. With this kind of agreement the company is able to manage its stock acquisitions far more effectively and efficiently.

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