At Erez Law, our investment fraud attorneys work hard to protect you the investor from fraud associated with misrepresentation, negligence or omissions made or left out by your stockbroker in conjunction with your investment into preferred stocks. If you believe that you have been the victim of investment fraud, we are here to help. Don’t let the actions of an unscrupulous broker or firm cause you financial harm. Our preferred stock convertible shares fraud attorneys can help you take legal action against the parties involved and may be able to help you recover the money that you lost due to fraud. Contact us by calling (888) 840-1571, chatting with us on our site, or by filling out a contact form. We are here to listen to you and help you take action to protect yourself and your portfolio.
What Are Preferred Stock Convertible Shares?
As with any investment, the risk of loss is always prevalent, and your investment into preferred stock may or may not lose value. Conversely, being unwilling to take any risks can lead to stagnation with your portfolio and perhaps missing an opportunity to secure good returns. This type of preferred stock may be alluring to investors as these shares can guarantee a fixed rate of return plus an opportunity to convert the shares into common stock if the investor so chooses.
Convertible shares are essentially a security that allows for conversion to common shares at some point in the future, often after a specified period or perhaps on a specific calendar date. The income facet of this investment is enticing, as these shares allow for a fixed stream of income and offer some safety to the investor’s initial investment.
It is the conversion of these shares into common stock when and if the price rises that is the most attractive part of this investment. Further, it provides a chance for the investor to participate in a tie in the stock price of a “hot” company while providing a safety net in the event the shares drop or remain stagnant.
How Preferred Stock Works
To perhaps better illustrate the advantages of preferred stock, let’s take a look at a fictional investment into convertible preferred shares in ABC Company. Let’s say for this example ABC issues one hundred thousand (100,000) shares of convertible preferred stock at fifty dollars ($50.00) a share. These shares offer fixed income, giving the investor an advantage over common share investors in two ways: first, the convertible preferred shareholder may receive a dividend of say, four percent if ABC continues to perform as expected before any dividend is paid to common shareholders. Second, convertible shareholders enjoy priority over common stock investors in the event ABC Company goes under as preferred shareholders receive monies in the event of liquidation before common shareholders. Last, one disadvantage to holding convertible shares is they rarely carry voting rights.
Let’s now examine the conversion of these preferred shares into common stock; at this point, an investor would, at worst, receive his four percent dividend for every share the investor owns. Now, as previously discussed, the opportunity for conversion is the attraction of ownership as the investor can convert part or all of his or her shares to common shares and gain equity (ownership and usually voting rights) in ABC Company.
There is a formula, known commonly as a conversion ratio, which allows for the determination of the number of common shares the investor will receive for each share of convertible preferred stock. This ratio is typically set well in advance of the sale of preferred shares and is usually determined with outside help from experienced investment professionals. For ABC Company, we will assume a conversion rate of five (5) percent, which allows a preferred shareholder to “cash in” one share of preferred stock for five common shares in return.
The conversion ratio then allows the preferred shareholder to determine just how much profit can be made from the conversion of his or her shares. This target price is often referred to as the conversion price and is factored in the following manner: just divide the cost of one preferred share by the conversion rate, which in this case is fifty dollars divided by five percent, which equals ten dollars ($10.00)
Simply put, a preferred shareholder would need to see the price of ABC Company at or above ten dollars a share to make a conversion profitable. And, in the event the shares drop below ten dollars after conversion, the shareholder will suffer a loss on the conversion.
Contact an Investment Fraud Attorney
Convertible preferred shares offer an investment vehicle who wish to invest in the stock market without the trepidation of risk involved with other investments. It is a good idea to make sure you have done your due diligence on both the company you are investing in and the broker assisting you in your transaction. If you feel that any wrongdoing, omission or other unscrupulous act has occurred, please immediately call the preferred stock attorneys of Erez Law at (888) 840-1571, fill out a contact form, or chat with us live to schedule a confidential consultation with us.