Does converted preferred stock dilute the value of common stock?
Among mature companies in particular, this is a valid concern. However, an issue of preferred stocks may still benefit assertive companies with good track records—and their investors—especially if profit margins can be maintained or increased. Investors should watch out for an anti-dilution provision in the conversion formula, designed to protect their holdings when subsequent stock is sold off more cheaply. It’s important to check exactly what protection is on offer—for example, the greater the safeguard on convertible preferred stock, the more likely common stock is to be diluted.
