What does 'convertible' mean in the context of preferred stock?

In the context of preferred stock, the term 'convertible' refers to the ability of the preferred shares to be exchanged for a predetermined number of common shares. This feature provides investors with the opportunity to benefit from potential appreciation in the common stock's value while still receiving the more stable income typically associated with preferred shares.

When preferred stock is convertible, it often includes a specific conversion ratio, indicating how many common shares one can receive for each preferred share. This characteristic is attractive to investors who may initially prioritize steady dividend payments but might also want to capitalize on growth opportunities in the company's common shares as market conditions change.

The other options do not capture the essence of what 'convertible' means in this context. While retiring preferred stock refers to a company's option to buy back shares, and transferring refers to selling or giving shares to another investor, these concepts do not relate to the exchange feature that defines convertible preferred stock. Additionally, the notion that convertible preferred stock has higher dividends than common stock does not pertain to the specific meaning of 'convertible,' as dividend rates can vary significantly between different classes of stock.