Bob Brinker's Marketimer

  Tuesday October 16, 2018

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To some investors, convertible preferred stock offers the best of both worlds. Because this stock can be converted to common stock if it rises to a specific price, it offers investors the benefit of owning both types. Like with a convertible car, they can leave the top up (stay with preferred stock) if the weather is cloudy—or put the top down (convert to common stock) if the weather is sunny and the company's common stock price is rising. Though it is fairly rare, some investors look for the double features of convertible preferred stock.

For instance, you may own a convertible preferred stock that you purchased for $22 per share. In this case, you could convert your preferred stock to common stock when the price of the common stock reaches, say, $26 per share. At that point, you may want to convert the stock and sell the common stock for a profit.

Convertibles offer higher income than common stock yet can gain more in value than regular preferred stock or bonds. If the price of the common stock drops instead of rising, the convertibles will retain their value better. This hybrid offers the prospect of higher returns than regular preferred stock, in exchange for a somewhat higher level of risk. Yet the risk is still less than it would be for common stock from the same company. Investors sometimes buy convertibles if a company's stock has a higher risk than they are comfortable with.

Critics may ask, What is the point of a convertible? Any investor can receive benefits similar to those of convertibles just by investing in different asset categories. The attraction of owning two different classes of stock in one still appeals to a number of investors, however.

Convertible preferred stocks can enhance the flexibility of an investor's portfolio, but they are not the only way to do so.


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