Quick Answer
Dividends are declared by the board of directors, never guaranteed, and you must buy before the ex-dividend date to receive one. Qualified dividends get capital-gains rates; stock dividends are untaxed until sold. Cumulative voting helps minority shareholders. Restricted and control securities face holding periods, volume limits, and filings.
The whole unit on one sheet: dividends, stock splits, voting methods, restricted-stock resale, and employee stock options the exam loves to test.
The One-Liners That Win Points
- Only the board of directors declares dividends. Shareholders do NOT vote on dividends and have no standing right to demand them.
- Buy before the ex-dividend date to receive the dividend. Under one-business-day (T+1) settlement, the ex-date is typically the same day as the record date.
- On the ex-date the stock opens lower by roughly the dividend amount.
- Cash dividends are taxable when received; stock dividends are not. A stock dividend just spreads the same total cost across more shares (lower cost basis per share, same total value).
- Qualified dividends get long-term capital-gains rates; ordinary dividends are taxed as ordinary income.
- Cumulative preferred arrearages must be paid in full before common stockholders see a dime. This is the single most tested preferred-dividend concept.
- Cumulative voting lets minority shareholders concentrate all votes on one candidate; statutory voting lets majority shareholders win every seat.
- Preemptive rights (antidilution) belong to common stock only, protecting ownership percentage, not price.
- Common stockholders are last in liquidation (residual claim); all debt ranks ahead of all equity.
- Restricted securities are restricted for what they are (unregistered); control securities are restricted for who holds them (an affiliate).
- Incentive stock options (ISOs) go to employees only. A consultant or independent contractor with options means a nonqualified stock option (NQSO).
Numbers to Lock In
| Item | Value |
|---|---|
| Qualified dividend holding period | more than 60 days in the 121-day window around the ex-date |
| Preferred voting (contingent) | granted only if dividends in arrears for a specified period |
| Subscription (preemptive) rights expiry | typically 30 to 45 days |
| Restricted-stock holding period, reporting issuer | 6 months |
| Restricted-stock holding period, non-reporting issuer | 12 months (1 year) |
| Affiliate volume limit (per 3 months) | greater of 1% of shares outstanding OR average weekly volume over prior 4 weeks |
| Form 144 filing trigger | more than 5,000 shares OR $50,000 in any 3 months |
| Form 4 (insider ownership change) | within 2 business days of the transaction |
| ISO annual vesting limit | $100,000 fair market value (FMV) per calendar year |
| ISO maximum term | 10 years from grant (5 years for a 10%-plus owner) |
| ISO holding for favorable rate | at least 1 year after exercise AND 2 years after grant |
Top Gotchas
- Buying on the ex-date means no dividend. You must buy before it.
- Ex-date vs record date: under T+1 the ex-date equals the record date, but the rule you get tested on is "buy before the ex-date," not "buy on the record date."
- Statutory vs cumulative voting: statutory casts votes seat-by-seat (majority dominates); cumulative pools all votes (shares times seats) onto fewer candidates so a minority can win a seat.
- Preemptive rights protect ownership percentage, not stock price, and preferred stock does not get them.
- Affiliates never escape the resale rule. Volume limits, Form 144, and manner-of-sale apply even to control shares bought on the open market, regardless of how long held.
- Form 4 is about timing, not size. Even a single-share insider trade triggers the 2-business-day filing; the 5,000-share / $50,000 threshold belongs to Form 144.
- ISOs owe no regular tax at exercise, but the spread is an alternative minimum tax (AMT) preference item. Miss either ISO holding rule and it becomes a disqualifying disposition taxed as ordinary income.
- The company gets no deduction for ISOs; it deducts only the NQSO ordinary income the employee recognizes.
One-Breath Recap
Only the board declares dividends, and you must buy before the ex-dividend date (the record date under T+1 settlement) to collect. Cash dividends are taxed on receipt while stock dividends just lower your per-share cost basis; qualified dividends earn capital-gains rates, and cumulative preferred arrearages clear before any common dividend. Cumulative voting helps the minority, statutory helps the majority, preemptive rights guard common-stock ownership percentage, and common stock stands last in liquidation. Restricted and control securities carry holding periods (6 months reporting, 1 year non-reporting), affiliate volume limits, and Form 144 filings, while ISOs go to employees only with AMT at exercise and NQSOs tax the spread as ordinary income.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Equity Characteristics unit for the complete lesson.