Convertible preferred stock.

In plain English

Convertible preferred stock blends features of bonds and common stock. Like regular preferred stock, it pays a fixed dividend and ranks ahead of common shares for dividends and in a bankruptcy. Like a convertible bond, it carries the right to convert into a set number of common shares, so it can share in the stock's rise. Investors get steadier income plus upside potential; the tradeoff is a lower fixed dividend than non-convertible preferred, the cost of the conversion feature, and the dilution that conversion creates. It is common in venture and startup financing and in some income portfolios.

01Why it matters

Convertible preferred mixes fixed income with stock upside, but the lower dividend is the cost of the conversion option, so understanding the tradeoff clarifies what the security actually delivers.

02The math, step by step

A convertible preferred share pays a 5 percent dividend and can convert into two common shares. You collect the steady dividend, and if the common stock doubles, converting captures that gain, unlike a plain preferred share.

03What this is NOT

04Receipts

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