Callable stocks are often referred to as redeemable stocks. The reason for this designation is that a callable stock can be recalled or redeemed by the issuer of the stock, assuming that certain conditions exist. Generally, callable stock is issued with a specific redemption price appearing in the terms and conditions of the sale.
A callable stock may come in the form of both common stock and preferred stock. It is not unusual for common callable stock to be issued by a parent company to one or more of its subsidiary companies. Preferred callable stock is usually reserved for investors or as part of the benefit packages for executives of the corporation. At all times, the issuer of the stock will retain the right to buy back on demand. However, this option is usually not exercised unless the move will prove to be financially rewarding for the issuer.
The most common event that may trigger the demand for the buy back of callable stock has to do with the stock price. If the value per share of the stock rises above the guaranteed figure that is included in the original issuance of the stock, the company may choose to redeem all or part of the outstanding shares. Once the investors have been paid off at the lower price per share, the company is free to offer the shares at the higher price to any and all interested parties. This will result in additional revenue for the company and often helps the business to expand.
For the investor, the idea of callable stock is not necessarily a one sided advantage. Because there is at least a guaranteed return on the callable stock in the event that the issuer wishes to buy back the shares on demand, the chance of making something off the investment is quite good. As with any stock investment, there is always the chance that the value of the callable stock will fall below the purchase price, but that is a risk inherent with any type of stock purchase.