What characterizes convertible securities?

Convertible securities are characterized by their ability to be converted into another form of asset, typically common stock, at a predetermined conversion ratio. This feature makes them an attractive option for investors, as they provide the benefits of fixed income investment—such as interest payments—while also offering the opportunity to participate in the potential appreciation of the underlying equity. When an investor converts a convertible security into common stock, they can benefit from any increase in the stock’s value, which can enhance overall returns.

This capacity for conversion allows investors to have the upside potential of equity while still receiving the downside protection typically associated with fixed-income securities. For this reason, the distinguishing feature of convertible securities is their convertibility into other assets, such as shares of the issuing company.