NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A client is considering an investment in a security that represents a claim on the underlying assets and earnings of a company, but has no voting rights. This security typically pays a fixed dividend that must be paid before common stockholders receive theirs. In the event of liquidation, these investors also have a priority claim over common stockholders. What type of security is this?
- ACorporate Bond
- BPreferred Stock
- CCommon Stock
- DWarrant
Show answer & explanationAnswer & explanation
Correct answer: B. Preferred Stock
Preferred stock typically carries no voting rights, pays a fixed dividend that has priority over common stock, and has a preferential claim on assets in liquidation, matching all the described characteristics.
Why the other options are wrong
- A. Corporate bonds are debt instruments, not equity, and pay interest (not dividends) with a higher claim than preferred stock.
- C. Common stock has voting rights, variable dividends, and a junior claim in liquidation.
- D. Warrants are long-term options to buy stock, not a direct ownership security with fixed dividends or liquidation priority.
Preferred Stock
A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, typically pays fixed dividends, but usually carries no voting rights.
- Fixed dividend payments (not guaranteed, but prioritized).
- No voting rights (generally).
- Priority claim on assets in liquidation over common stockholders.
- Less volatile than common stock, more sensitive to interest rates.
Memory trick: Preferred Stock: The 'preferred' child – gets paid first, but no say.