1.1 Common Stock Basics
Common stock represents equity ownership in a corporation. Holders have voting rights, entitlement to declared dividends, inspection rights, and limited liability, but occupy the lowest priority in bankruptcy.
Key FINRA Exam Takeaways
- Common stockholders are the junior-most residual claimants in corporate liquidation.
- Statutory voting: 1 vote per share per open seat; favors large majority shareholders.
- Cumulative voting: Total votes = shares × seats; can allocate all votes to one seat; favors minority shareholders.
- Preemptive rights allow existing shareholders to maintain proportionate ownership before new share issuance.
- Stockholders have the right to inspect corporate books, but NOT management minutes or private emails.
Voting Rights: Statutory vs. Cumulative
In statutory voting, a shareholder with 100 shares voting on 3 board seats may cast up to 100 votes for candidate A, 100 for B, and 100 for C. In cumulative voting, the shareholder has 300 total votes (100 × 3) and can cast all 300 votes for a single candidate, empowering minority blocks.
Order of Liquidation in Bankruptcy
1. Secured Creditors (mortgage bonds, collateral trusts); 2. Unsecured Creditors & General Creditors (debentures, suppliers, wages, taxes); 3. Subordinated Debt; 4. Preferred Stock; 5. Common Stock (residual claimant).
| Feature | Statutory Voting | Cumulative Voting |
|---|---|---|
| Calculation | Votes = Shares owned per director seat | Votes = Shares owned × Number of open seats |
| Allocation | Cannot cast more than owned shares on 1 seat | Can cast all accumulated votes on 1 seat |
| Beneficiary | Favors majority / large shareholders | Protects & empowers minority shareholders |
An investor owns 400 shares of common stock in a company with 4 open board seats. Under cumulative voting, what is the maximum number of votes the investor can cast for a single candidate?