What is the main purpose of a convertible preferred stock?

The primary purpose of convertible preferred stock is to allow the holder to convert their preferred shares into a specified number of common shares at some point in the future, often at the discretion of the shareholder. This feature provides investors with the potential for capital appreciation through conversion, as common stocks generally have greater upside potential than preferred stocks. With the conversion option, investors can benefit from the growth of the company if it performs well, while still enjoying the benefits of fixed dividends and higher claim priority in the event of liquidation while they hold the preferred shares.

The appeal of this type of security lies in its hybrid nature, offering both the steady income characteristic of preferred stock and the growth potential typically associated with common stock. Investors are incentivized to invest in convertible preferred stock because it combines these features, making it an attractive option for those seeking both income and growth potential.