Callable Common Shares

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ma5terroj

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There is probably a simple misunderstanding from my side but I am reading about the callable common shares and it states that companies benefit from this option because it allows them to buy back the shares at a price below the market price. This is confusing to me. Isn’t the callable price set at some % over market price (book ex. 20% over market price) or does firms sometimes set a specific price (ex. $20). If the later, who would hold on to such shares once it hits the specific price ($20 in this instance)? Also, wouldn’t the market price for such shares be capped at $20?
Thanks!
 
The call price is exercisable after a certain date, when it can be lower than market price.
 
It depends under what terms the callable shares were issued. It could be a ype of call option with an exercise price (strike price) like self_employed noted. In such a case the stock will effectively be capped at the exercise price since owners of the shares will have their shares bought by the issuer at exercise price, like you noted.
An alternative to exercise price is premium over market price; owners’ shares are bought by the issuer at a price higher than the market price; say 5% premium: bought at $105 vs. value of $100.
 
The text discusses callable stock for which the call price is established (fixed) when the shares are issued, not a call price that is related to (and above) the market price at the time the shares are called.
I suspect that even though the call price is, say, $50/share, the market price could rise above $50/share if the market views it as unlikely that the shares will be called. The dynamics would be different than those for callable bonds because the latter mature and, therefore, must be redeemed at some point, while the former need never be redeemed.
 
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