Convertible Preference Shares
Convertible preference shares give the preference shareholders the right to convert their shares into a specified number of common shares. These shares are the type of preference shares where the holder has the option to convert into the common/equity share of the company. The ratio of how many common shares an investor will get for each preference share is called conversion ratio. These are those shares that can be converted into equity shares within a certain period.
This kind of preference share is useful for the investors who want to receive a preferred share dividend and also participate in any kind of upward change in the price of the issuer’s common shares. An investor has many advantages in buying convertible preference shares instead of directly buying common shares. So, an investor has the benefit and security of a fixed return along with a chance to earn a higher return on his/her investment. But the convertible preference shareholders can convert into common shares within a certain period as agreed in the memorandum. Convertible preferred stock is used by corporations for fundraising purposes. Companies can raise capital in two ways: debt or equity. The debt must be paid back regardless of the firm’s financial situation, but it generally costs less to obtain after tax incentives.
Preference shares earn a higher dividend compared to common shares and also allow them to participate in the company’s profits. There are a number of investment options available to those looking to make money in the stock market. Most people probably think of common shares when they think of investing in stocks, but preference shares can also be a lucrative investment vehicle. Convertible shares are preferred shares that can be exchanged for common shares at a fixed rate. This can be especially lucrative for preferred shareholders if the market value of common shares increases.
Convertible preferred shares provide investors the option to participate in common stock share appreciation. Convertible preferred stock can be converted to common shares at the conversion ratio. The conversion ratio is set by the company before the preferred stock is issued. For example, one preferred stock may be converted into two, three, four, and so on, common shares. If the common shares rise, the preferred shareholder may opt to convert their shares into common stock, thus realizing an immediate profit. Preferred shares receive an “almost” guaranteed dividend, but the downside is the dividend does not grow like the common stock dividends.