What type of preferred stock allows investors to convert their preferred shares into common stock?

The correct answer is convertible preferred stock, which specifically includes the feature that allows investors to convert their preferred shares into a predetermined number of common shares. This type of preferred stock offers a unique advantage for investors, as it combines the stable dividends of preferred shares with the potential for capital appreciation through conversion into common stock.

Investors are typically attracted to convertible preferred stock because it provides an opportunity to benefit from the company's growth while still enjoying the fixed-income-like characteristics of preferred shares. If the company's common stock performs well, holders of convertible preferred stock can convert their shares to take advantage of that performance, thus aligning their interests with common shareholders.

The other types of preferred stock mentioned do not provide this conversion feature. Straight preferred stock does not come with any additional rights beyond receiving fixed dividends. Cumulative preferred stock ensures that any missed dividend payments are paid in full before dividends are distributed to common shareholders, but it does not allow for conversion to common stock. Participating preferred stock entitles holders to receive their fixed dividend and also participate in additional earnings beyond that, but it also lacks a conversion provision.