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Convertible Preferred Stock

Shares of convertible preferred stock have the option of being converted into shares of common stock. The conversion can be made at any time, and the price of the conversion is fixed. Because of this feature, the price of convertible preferred shares tends to fluctuate closely with the economic performance of the company, as well as with interest rates.

For example, you buy XYZ convertible preferred with a 6% fixed-interest and a conversion price of 30. Six months later, benchmark interst rates have not changed, but shares of common stock are trading at 38. You have the option of converting your preferred stock into common stock and then selling it in the stockmarket for $8 of profit per share. Because of this option, your shares of convertible preferred are worth more and will generally trade at a higher price than other preferred shares.

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Convertible Preferred Stock