Introduction

Welcome to Preferred Stock: the equity security that behaves like a bond but represents ownership in a corporation.

Exam Weight: Part of Function 3 (73%, ~91 questions)

What You'll Learn

In this unit, you'll cover:

• Preferred Stock Fundamentals: What preferred stock is, how it differs from common stock, and why its price behaves like a bond
• Types of Preferred Stock: Cumulative, non-cumulative, participating, convertible, callable, and adjustable-rate preferred
• Rights of Preferred Stockholders: Liquidation priority, dividend preference, and voting limitations
• Convertible Preferred (Advanced Concepts): Anti-dilution adjustments, sinking fund provisions, and when to convert
• Preferred Stock and Interest Rates: The inverse price/rate relationship and current yield calculations

Why This Matters

Preferred stock sits at the crossroads of equity and fixed income, and the Series 7 exam tests your ability to distinguish it from both. You need to understand who holds the rights (issuer vs. holder), how dividends accumulate, when conversion makes sense, and how interest rates drive preferred stock prices. Expect calculation questions on conversion ratios, parity prices, dividends in arrears, and current yield.

Let's start with the fundamentals of what preferred stock is and how it compares to common stock.