Convertible preference shares give the preference shareholders the right to convert their shares into a specified number of common shares. The ratio of how many common shares an investor will get for each preference share is called conversion ratio. An investor has many advantages in buying convertible preference shares instead of directly buying common shares.
- Preference shares earn higher dividend compared to common shares and also allow them to participate in company’s profits.
- As the common shares’ price increases, the option to convert becomes valuable.
- Preference shares are less risky than common shares and have priority claim over firm’s assets than common shares.