Common and Preferred Stock Essentials
Key facts on voting, dividends, liquidation priority, rights, warrants, and splits for the SIE exam.
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Questions Covered in This Set
10 cards to master
What rights does a common stockholder typically have?
One vote per share (board, mergers, splits, new issues), preemptive right, dividends when declared, residual claim in liquidation, limited liability, and inspection of books.
Statutory vs. cumulative voting
Statutory: shares × votes for EACH seat separately (100 shares, 3 seats = 100 votes per seat). Cumulative: pool votes (100 × 3 = 300) to allocate freely — benefits minority shareholders.
What is the preemptive right and how is it exercised?
The right to maintain your percentage ownership when new shares are issued; exercised through a rights offering.
List the liquidation priority ladder.
IRS/taxes, secured creditors, unsecured creditors/general bondholders, subordinated debt, preferred stock, then common stock last.
How is a preferred dividend calculated?
Fixed percentage of $100 par: a 6% preferred pays $6 per year, usually $1.50 quarterly.
What is the dominant risk for preferred stock and why?
Interest rate risk — its price moves with interest rates rather than company earnings, since the dividend is fixed.
Cumulative preferred: 5% preferred skips 2 years, then resumes. What must be paid before common dividends?
$15 per share ($5 arrears + $5 arrears + $5 current).
$100 par preferred convertible at $20, common trading at $25 — what is parity?
Conversion ratio = 5 shares; parity price of the preferred = 5 × $25 = $125.
Rights vs. warrants: exercise price and life
Rights: exercise price BELOW market, short life (30–45 days), given to existing shareholders. Warrants: exercise price ABOVE market at issuance, long life (5–10 years or perpetual), often a sweetener on bonds/preferred.
Effect of a 2:1 forward split
Shares double, price per share halves; total position value and company market cap are unchanged.
