Section 2.1Investment Vehicle Characteristics

Equities, Preferred Stock & Corporate Governance

Analyzes the characteristics of common stock, preferred shares, preemptive rights, warrants, American Depositary Receipts, and corporate voting.

Key Exam Takeaways

Common stockholders have residual claims to assets and preemptive rights to maintain proportionate ownership.
Cumulative voting empowers minority shareholders by allowing total votes (shares * seats) to be cast for a single candidate.
Preferred stock pays fixed dividends and is senior to common stock in liquidation, but typically lacks voting rights.

Common Exam Traps

Cumulative voting is not cumulative preferred stock; cumulative voting is a board election method, while cumulative preferred relates to unpaid dividend arrears.
Rights are short-term and discounted; warrants are long-term and priced at a premium to market.

Common stock represents residual ownership in a corporation. Common shareholders elect the board of directors and vote on major structural corporate actions. In statutory voting, an investor can cast only their share count per open board seat. In cumulative voting, total votes can be concentrated on one candidate.

Preferred stock provides equity ownership with bond-like fixed dividend payments. Cumulative preferred stock mandates that any skipped quarterly dividends must be paid in full (arrears) before any common dividends can be distributed. Convertible preferred stock allows holders to exchange shares for common stock.

American Depositary Receipts (ADRs) are foreign corporate shares held in trust by a U.S. bank and traded on domestic exchanges in U.S. dollars. Although denominated in USD, ADRs expose investors to foreign currency risk because foreign dividend payments are converted at prevailing exchange rates.

🎯 Knowledge Checkpoint

Knowledge Checkpoint • Section 2.1

A minority shareholder owns 100 shares of common stock in a corporation where an election is being held to fill 3 open seats on the Board of Directors. How does the voting mechanic differ if the corporate charter mandates cumulative voting rather than statutory voting?