What does it mean for a security to be convertible?

A convertible security is one that can be exchanged for another type of security, typically shares of common stock. This feature gives the holder the option to convert their investment into equity, which can potentially provide benefits if the issuer's stock performs well. The conversion is often done at a predefined ratio, meaning holders can gain equity ownership in the company without initially purchasing shares directly.

The ability to convert into stock can enhance the attractiveness of a bond or preferred share, offering both fixed income potential and the opportunity for capital appreciation as stock prices rise. This characteristic distinguishes convertible securities from other types of investments, making them appealing to investors looking for a blend of fixed-income stability and equity growth potential.