Final answer:
The conversion of preferred stock refers to the process of converting preferred shares into common shares of a company through a predetermined conversion ratio. It allows investors to participate in the future growth and profits of the company.
Step-by-step explanation:
The conversion of preferred stock refers to the process of converting preferred shares into common shares of a company. This conversion usually occurs at a predetermined conversion ratio, which determines how many common shares can be obtained from each preferred share. The purpose of this conversion is to provide investors with the opportunity to participate in the future growth and profits of the company.
For example, let's say a company has issued preferred stock with a conversion ratio of 5:1. This means that for every 5 preferred shares, the investor can convert them into 1 common share. If the investor decides to convert 10 preferred shares, they will receive 2 common shares.
The conversion of preferred stock allows investors to potentially benefit from capital appreciation and dividend payments that are typically associated with common shares.