How to Determine Convertible Preferred Stock

Use the prospectus to determine convertible preferred stock.

Investors can invest in a company through stocks and bonds. Stocks represent company ownership, and bonds represent a debt for the company. Stockholders are compensated with dividends, and bondholders are compensated with interest. Preferred stock is considered a hybrid security with characteristics of both stocks and bonds. Like stocks, preferred stock pays investors a a dividend; however, like bonds, the preferred stock dividend usually is paid on a semi-annual basis and is a certain percentage of the preferred stock's redemption value. One type of preferred stock, convertible preferred, even allows investors to convert to regular common stocks.

Instructions

1. Download or request the prospectus for the company in which you own preferred stock. Like bonds, every preferred stock issuance must be accompanied by a prospectus. A prospectus is a legal document required by the Securities and Exchange Commission that contains full disclosure of the issuance's main features.

2. Turn to the section in the prospectus on convertibility. This may be in the Table of Contents under Features and Pricing or a similar title. Look for language such as "conversion price" and "conversion ratio."

3. Search for language that specifically states the price the stock must reach for the preferred stock to be eligible for conversion. Some convertible stock may have a section on convertibility. However, the conversion requirements may be difficult to meet. Determine whether the conversion price, which is the price the common stock must reach to convert preferred shares, is realistic before assuming you have the option to convert.

References

• InvestingAnswers: Convertible Preferred Stock