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Convertible Preferred Stock

Convertible preferred stock offers both risk and reward for investors. By investing in convertible preferred stock, an investor is essentially trading the limited upside potential of a fixed income security for the potential of increased upside from equity appreciation. In addition, convertible preferred stock enables companies to raise money from investors without having to issue more common shares.

In terms of risk, convertible preferred stock is usually more risky than straight debt and less risky than common stock. While there is no fixed dividend obligation, convertible preferred capital can still be redeemable and would have priority over common stock if a company was ever liquidated. Furthermore, the shareholders’ conversion rights can be affected by the performance of the underlying common stock, which can result in a lower than expected return on investment as the common stock price may not appreciate above the conversion price.

Convertible preferred stock provides companies with a lower cost of capital than straight debt or common stock without increasing the number of shares that are outstanding. This can be an attractive option for companies who want to raise capital without the dilution effects that come with the issuance of common shares.

In conclusion, for savvy investors, convertible preferred stock can be an attractive investment and a potential source of higher returns than debt securities. As with any security, however, investors need to be careful and weigh the risks and rewards before making any decision.

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