What are convertible securities?

Convertible securities are unique financial instruments, primarily consisting of bonds or preferred stocks, that can be transformed into a predetermined number of shares of the issuing company's common stock. This conversion feature provides investors with the opportunity to benefit from potential stock price appreciation while also offering the income and security characteristics of debt. When the underlying company performs well and its stock price increases, investors can convert these securities into equity, allowing them to participate in the company's growth.

The focus on bonds or preferred stocks that are eligible for conversion highlights the dual nature of these securities: they function as both debt and equity until the conversion occurs. This characteristic of providing an option to convert is what distinguishes convertible securities from traditional investments, which do not have this flexibility. The conversion price and terms are usually specified at the time of issuance, giving clarity to investors about when and how they can convert their holdings into shares.