Convertible Preferred Stocks are a type of security that offer investors the opportunity to choose between a fixed number of shares or common shares. They are also commonly referred to as hybrid securities or hybrid instruments. A company can issue convertible preferred stock either as a traditional stock or through an Initial Public Offering (IPO). Investors can make money from convertible preferred stocks only when the price of the security increases, and they can sell their shares at any time.Investors who choose to purchase convertible preferred stocks typically receive a fixed number of shares in return for their initial investment. However, the company reserves the right to convert all or part of the shares into common stock prior to the predetermined date. This conversion gives investors an opportunity to make more money if the company’s share price increases after they purchase their preferred stock. It also safeguards the company from having a large number of unsold shares should its share price decrease significantly. The conversion rate— also called conversion premium — is typically higher than the current market price of the common shares. This ensures that investors have enough value after converting their preferred stock into common stock.Convertible preferred stocks are commonly issued by companies that offer a dividend that is paid in common shares. This incentivizes investors because it gives them an opportunity to increase their investment by collecting dividends each quarter instead of converting their preferred stock into additional profits. As such, convertible preferred stocks are commonly used as part of internal financing strategies at publicly traded companies as well. Employers often issue convertible preferred stocks as part of employee equity plans so staff members can accumulate resources for future investment ventures with the company’s help. Convertible preferred stocks are also popular with venture capital firms since they allow these firms to provide start-up companies with quick capital while retaining ownership in these businesses should they succeed.
