Final answer:
Convertible preferred stock allows conversion into common stock shares, offering potential capital gains, whereas nonconvertible preferred stock does not convert, providing fixed dividend payments instead.
Step-by-step explanation:
The distinction between convertible preferred stock and nonconvertible preferred stock lies in the option to convert the shares into a predetermined number of common stock shares.
Convertible preferred stock gives the investor the choice to transform their preferred shares into common shares, under specific conditions, which can be an advantage if the common stock's price rises significantly.
On the other hand, nonconvertible preferred stock does not offer the option to convert and investors only benefit from the fixed dividends and priority over common stock in the event of liquidation.
Financial investors might favor convertible preferred stock for the potential capital gains associated with the increase in the common stock price, as they can benefit from both dividends and the appreciation in stock value.
However, for those seeking steady income and less concerned with stock price changes, nonconvertible preferred stock might be preferred due to its fixed dividend payments without the associated volatility of the market.