Quick Answer
Common stock is ownership with voting rights, unlimited upside, and a last-in-line residual claim. Preferred stock is a hybrid paying a fixed dividend with priority over common but usually no vote. American Depositary Receipts let you hold foreign shares in dollars but keep currency risk. Investor-friendly features cut the dividend rate; the callable feature raises it.
The whole unit on one sheet: common stock, preferred stock and its varieties, foreign shares, ADRs, and shareholder rights.
Which One-Liners Win Points?
- Common stock is the most junior security: residual owners get paid last in liquidation, after all creditors and preferred holders.
- Limited liability caps the loss at the amount invested; upside is unlimited.
- Key common-stock rights: vote (board and major actions), preemptive (buy new shares first, only if granted in the articles), inspect the books, transfer shares, and receive dividends only if the board declares them.
- Statutory voting = one vote per share per seat, favoring majority holders. Cumulative voting lets a shareholder pool all votes onto one candidate, favoring minority holders.
- A proxy is written authorization for someone else to vote your shares; solicitation is SEC-regulated under the Exchange Act of 1934.
- Total return = (capital gain + dividends) / initial investment, not dividend yield alone. Example: buy $50, sell $60, $2 dividend: ($10 + $2) / $50 = 24%.
- A stock split changes share count and price, never total position value, and is not a taxable event (cost basis per share adjusts). Forward split (e.g., 2-for-1): more shares, lower price. Reverse split (e.g., 1-for-10): fewer shares, higher price, often to hit a listing minimum. Splits get a shareholder vote; a stock dividend (shares from retained earnings) is different.
Exam Tip: Gotchas
- A worked example shows why cumulative voting helps a minority holder. Take 200 shares and 3 board seats. Statutory voting caps the investor at 200 votes per seat. Cumulative voting pools all seats into 200 x 3 = 600 votes, castable for one candidate, giving a minority holder a real shot at a board seat.
- No dividend is ever guaranteed. Both common and preferred require board declaration. Priority only decides who gets paid first if the board does declare.
- Preferred stock is a hybrid: fixed dividend, priority over common for dividends and in liquidation, generally no voting rights, and its price moves with interest rates like a bond.
- Straight (non-cumulative) preferred: a missed dividend is simply lost, it does not accumulate as an arrearage.
- Cumulative preferred: missed dividends pile up as arrears and must all be paid before common gets anything.
- Participating preferred: gets the stated dividend plus a share of extra profits.
- Convertible preferred: exchangeable for a set number of common shares (conversion price = par value divided by conversion ratio); carries moderate interest rate risk, since conversion upside offsets some of the rate-driven decline.
- Callable preferred: issuer can redeem after a set date, creating reinvestment risk for the holder.
- Floating rate preferred: dividend resets on a benchmark plus a spread, so its price stays relatively stable when rates move.
Exam Tip: Gotchas
- Preferred generally has no vote. If a question asks which class of equity votes, the answer is common stock.
- Callable preferred pays MORE, not less. The call benefits the issuer, so investors demand a higher rate.
- American Depositary Receipt (ADR): a U.S. bank certificate for foreign shares; trades and pays dividends in dollars but does NOT remove currency risk.
- Sponsored ADRs involve the foreign company, may list on major exchanges, and pass through voting rights; unsponsored ones are bank-created, trade over-the-counter (OTC), and carry limited or no voting rights.
Exam Tip: Gotchas
- ADRs keep currency risk. Dollar trading and dollar dividends are convenience, not risk elimination. Foreign tax may still be withheld, offset by a foreign tax credit.
- Currency risk bites even when the foreign company thrives. A stronger dollar shrinks the U.S. investor's return regardless of the local stock price.
- Exchange controls are not currency risk. Currency risk is a value decline; exchange controls restrict converting or moving money out of the country. Foreign stock can still reduce overall portfolio risk through low correlation with U.S. returns, despite carrying these extra risks.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Preferred stock typical par value | $25 or $100 per share |
| Floating-rate reset frequency | typically quarterly |
| Common stock par value significance | nominal (irrelevant to value) |
What Is the Yield Trade-Off Principle?
- If a feature helps the investor, the dividend rate can be lower: cumulative, participating, and convertible all pay less than straight preferred.
- If a feature helps the issuer, the dividend rate must be higher: callable preferred pays more to compensate for reinvestment risk.
- Floating rate varies with the benchmark rather than sitting fixed above or below straight preferred.
Exam Tip: Gotchas
- All debt is paid before any equity in liquidation. Within debt: secured, then unsecured, then subordinated. Preferred is equity, so it lands after every creditor and ahead of common.
One-Breath Recap
Common stock is ownership: voting rights, unlimited upside, limited liability, and a last-in-line residual claim, with dividends only if the board declares them and cumulative voting the minority shareholder's friend. Preferred stock is the hybrid: fixed dividend, priority over common, usually no vote, bond-like sensitivity to interest rates, and flavors of cumulative, participating, convertible, callable, and floating rate. Investor-friendly features cut the dividend rate while the callable feature raises it. American Depositary Receipts hold foreign shares in dollars but keep currency risk, and in liquidation every creditor is paid before any equity, preferred before common.
Need more than the recap? Read the full Equity Securities unit.