NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsEasy
A client is looking to invest in a security that provides a fixed income stream and has preference over common stockholders in the event of a company's liquidation. However, they are also aware that this security typically does not have voting rights. Which of the following best describes this investment?
- ACorporate Bond
- BCommon Stock
- CWarrant
- DPreferred Stock
Show answer & explanationAnswer & explanation
Correct answer: D. Preferred Stock
Preferred stock offers a fixed dividend and has priority over common stock in liquidation, but typically lacks voting rights, fitting the client's description perfectly.
Why the other options are wrong
- A. Corporate bonds are debt instruments, not equity, and have a higher claim than preferred stock in liquidation.
- B. Common stock has voting rights and variable dividends, and is subordinate to preferred stock in liquidation.
- C. Warrants are long-term options to buy stock at a fixed price and do not offer income or liquidation preference.
Preferred Stock
A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, typically paying a fixed dividend, but usually without voting rights.
- Fixed dividend payments, often cumulative.
- Priority over common stock in liquidation.
- Typically no voting rights.
- Less volatile than common stock, more volatile than bonds.
Memory trick: Equity is ownership, Debt is a loan. Preferred is in-between.