What type of preferred stock allows the owner to exchange it for common stock under specific terms?

Convertible preferred stock is a type of preferred stock that grants the holder the right to exchange their preferred shares for a specified number of common shares, under predetermined terms. This feature is particularly attractive to investors because it allows them to benefit from the potential appreciation of the common stock while still receiving the fixed dividends associated with the preferred stock.

The conversion terms, such as the conversion ratio and price, are established at the time the stock is issued. If the company performs well and the value of its common shares increases, investors can convert their preferred shares into common shares, thus capitalizing on that growth. This flexibility makes convertible preferred stock a hybrid financial instrument that combines elements of both equity and fixed-income investments.

Each of the other types of preferred stock contains distinct characteristics but does not provide the conversion feature to common stock, which is the defining aspect of convertible preferred stock.