What is convertible preferred stock?

Convertible preferred stock refers specifically to a type of preferred stock that can be converted into a predetermined number of common shares at certain times and under specified conditions. This type of financial instrument offers the benefits of both equity and fixed income. Holders of convertible preferred stock typically receive regular dividend payments, similar to bond interest payments, and they also have the potential to convert their shares into common stock, which allows them to participate in any upside associated with the company's growth.

This flexibility makes convertible preferred stock an attractive option for investors who want the security of fixed dividends but also want the opportunity for capital appreciation through conversion to common equity. The conversion hierarchy effectively allows investors to benefit from both the stability of preferred stock and the potential appreciation of common stock, aligning with certain investment strategies that look for a balance between risk and reward.