Convertible preferred stock is one of the four main types of preferred stock, the others being participating preferred stock, cumulative preferred stock, and non-cumulative preferred stock. It may be differentiated from the others because the holder may eventually choose to have it converted into common stock.
Before the sale of a convertible preferred stock is closed, conditions are set and agreed on. One of the most important provisions to consider before the purchase of a convertible stock is the ratio between convertible preferred stock to common stock, should a conversion take place. Also the price of conversion as well as the date after which a conversion may be initiated should be part of this agreement. After the convertible stock has been converted into common stock, it is no longer possible to revert back to a preferred stock. Holders of convertible preferred stocks, as with other preferred stock holders, are usually not given voting rights.
Convertible preferred stocks are not very commonly issued. These sometimes benefit a company which needs to raise revenue very quickly. Also, while holders normally decide on whether or not to convert their stocks, the company can also force a conversion to take place.
