Legal Definitions - convertible security

A convertible security is a type of investment that can be converted into another type of investment. It is a security that can be changed into a different security, usually a stock or a bond.

For example, a company may issue convertible bonds that can be converted into shares of the company's stock. This means that the investor can choose to keep the bond and receive interest payments, or convert it into stock and potentially benefit from the company's growth.

Another example is a convertible preferred stock, which can be converted into common stock. This allows the investor to benefit from any increase in the company's stock price.

Convertible securities are popular because they offer flexibility and potential for higher returns. However, they also carry more risk than traditional securities because their value depends on the performance of the underlying asset.