NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
An investor is considering purchasing shares in a company that is expected to have stable earnings and pay consistent dividends. They are particularly interested in receiving these dividends before common shareholders and having a preferential claim on assets in case of liquidation. Which type of equity security would best meet these requirements?
- AWarrants.
- BRights.
- CPreferred stock.
- DCommon stock.
Show answer & explanationAnswer & explanation
Correct answer: C. Preferred stock.
Preferred stock offers a fixed dividend payment that must be paid before common shareholders receive any dividends. It also has a preferential claim over common stock on a company's assets in the event of liquidation, making it suitable for investors prioritizing income, stability, and asset protection.
Why the other options are wrong
- A. Warrants are long-term options to buy stock at a fixed price, offering no dividends or preferential claims on assets.
- B. Rights are short-term options allowing existing shareholders to buy new shares, offering no dividends or preferential claims on assets.
- D. Common stock offers voting rights and potential for higher capital appreciation, but dividends are not guaranteed and common shareholders are last in line during liquidation.
Preferred Stock
An equity security that represents ownership in a company but has different features than common stock. It typically pays fixed dividends and has a higher claim on company assets and earnings than common stock.
- Dividends are usually fixed and must be paid before common stock dividends.
- No voting rights, generally.
- Less volatile than common stock, but less growth potential.
Memory trick: Equity: who gets what, and when.