Essential Concepts
In preparing for the FINRA Series 7 exam, mastering the core concepts of equity securities is crucial. Understanding the different types of equity products, investor voting rights, and dividend structures can significantly enhance your proficiency and exam performance.
Types of Equity Securities
1. Common Stock
Common stock represents ownership in a corporation and a claim on a portion of the profits. Shareholders of common stock typically exercise control by electing a board of directors and voting on corporate policy. The value of common stock is subject to the company’s profitability and performance in the market.
2. Preferred Stock
Preferred stockholders are prioritized over common stockholders for dividend payments and in the event of liquidation. Preferred stocks often pay fixed dividends but do not typically confer voting rights. They tend to be more stable than common stocks but offer less potential for appreciation.
Voting Rights in Equity Securities
- Common Stockholders: Generally have the right to vote on important matters, including the election of directors; each share typically gives one vote.
- Preferred Stockholders: Usually do not have voting rights; focus instead on dividend stability.
Dividend Structures
- Cash Dividends: Payments made in cash to shareholders, typically on a quarterly basis.
- Stock Dividends: Additional shares offered to shareholders instead of cash payments, thus expanding shareholders’ equity.
- Property Dividends: Distribution of assets other than cash, such as physical goods or other securities.
Understanding these dividend structures helps analysts estimate company performance and shareholder value over time.
Glossary
- Common Stock: Equity ownership in a corporation with voting rights and potential dividends.
- Preferred Stock: Equity with prioritized dividends but typically without voting rights.
- Dividends: Distributions of a company’s earnings to shareholders.
Additional Resources
Interactive Quizzes
Prepare for the Series 7 exam with these quizzes designed to reinforce key concepts of equity securities:
### What is the primary benefit of holding common stock?
- [x] Potential for capital appreciation and voting rights.
- [ ] Guaranteed dividend income and voting rights.
- [ ] Fixed dividend income without voting rights.
- [ ] Protection from market volatility and fixed income.
> **Explanation:** Common stockholders benefit from potential capital appreciation and usually have voting rights, unlike other equity types that offer fixed income.
### Which type of stock typically does not grant voting rights?
- [ ] Common stock
- [ ] Growth stock
- [x] Preferred stock
- [ ] International stock
> **Explanation:** Preferred stock generally does not provide voting rights but instead offers fixed dividend payments and prioritization over common dividends.
### What type of dividend is paid in forms other than cash?
- [ ] Cash dividends
- [x] Property dividends
- [ ] Income dividends
- [ ] Liquidating dividends
> **Explanation:** Property dividends involve distributing assets, other than cash, to shareholders and are less common than cash dividends.
### Which statement best describes a stock dividend?
- [x] It involves additional shares issued to shareholders.
- [ ] It provides a guaranteed cash payment annually.
- [ ] Corporations distribute non-cash assets.
- [ ] It maximizes shareholder voting power.
> **Explanation:** Stock dividends increase the number of shares owned by issuing new shares proportionately to existing shareholders without a cash outflow.
### Identify two types of equity securities with different rights and privileges.
- [x] Common stock
- [x] Preferred stock
- [ ] Bonds
- [ ] Options
> **Explanation:** While both are equity securities, common stock generally offers voting rights and potential capital gains; preferred stock typically provides dividends but no voting rights.
### Common stockholders are entitled to which of the following rights?
- [x] Voting on major company decisions
- [ ] Receiving fixed quarterly dividends
- [ ] Priority payout over preferred stock
- [ ] Exemption from tax on dividends
> **Explanation:** Common stockholders can vote in significant corporate decisions, but they do not have guaranteed dividends or payout priority.
### Which of the following is true about preferred stock dividends?
- [x] Typically fixed and prioritized over common stock dividends
- [ ] Always variable and higher than common stock dividends
- [x] May be cumulative for later payments if missed
- [ ] Guaranteed regardless of company performance
> **Explanation:** Preferred stock dividends are usually fixed and prioritized over those for common stock, and sometimes offered on a cumulative basis.
### In liquidation, who is paid first?
- [x] Creditors and preferred stockholders
- [ ] Common stockholders and creditors
- [ ] Board of Directors
- [ ] Government entities
> **Explanation:** In liquidation, company assets are first used to pay creditors and then preferred stockholders before common stockholders.
### What does the term "dividend yield" refer to?
- [x] Ratio of a company's annual dividend compared to its share price
- [ ] The total amount of dividends paid in a fiscal year
- [ ] The fixed rate paid by preferred stock regardless of price
- [ ] A stock's intrinsic value relative to its dividends
> **Explanation:** Dividend yield measures a company's annual dividend relative to its share price, offering insight into income return.
### Dividends must be paid in cash. True or False?
- [ ] True
- [x] False
> **Explanation:** Dividends can be paid in various forms, including cash, stock, and property, depending on the corporation's policy and financial status.
Summary and Exam Preparation
Understanding the fundamental concepts of equity securities is essential for any candidate preparing for the FINRA Series 7 exam. By familiarizing yourself with different types of equity, voting rights, and dividend structures, you enhance your ability to assess securities effectively. Reinforce these concepts with the practice quizzes provided, and consider further exploration through the additional resources to solidify your comprehension.