Equity Securities

The whole unit on one sheet: what each equity is, who gets paid first, and the resale limits the exam loves to test.

Common vs. Preferred at a Glance

• Common stock: ownership (equity), residual owner (paid last), limited liability (lose only what you invested), unlimited upside. Returns come from dividends (if declared) and capital appreciation.
• Preferred stock: hybrid of equity and debt, pays a fixed dividend (a rate, not a guarantee), paid before common, priority over common in liquidation but subordinate to all debt, generally no voting rights, price moves inversely with interest rates like a bond.
• Voting: statutory = one vote per share per seat (helps majority); cumulative = pile all votes on one candidate (helps minority).
• Cumulative preferred: skipped dividends pile up as arrearages; ALL arrearages plus the current dividend must be paid before ANY common dividend.

The One-Liners That Win Points

• Broker = agent on a right sale; convertible conversion is the investor's option, never the company's.
• Rights: subscription price below market, short-term (30-45 days), issued to existing shareholders to prevent dilution.
• Warrants: exercise price above market at issuance, long-term (2-5+ years), a sweetener on a bond or preferred offering, issued by the corporation (not the Options Clearing Corporation, OCC).
• Both rights AND warrants create new shares (dilutive) when exercised.
• American depositary receipt (ADR): certificate for a foreign company's shares, trades on U.S. exchanges in U.S. dollars, still carries currency risk.
• Callable preferred benefits the issuer (calls when rates fall); convertible/participating preferred carry lower dividend rates for the extra feature.

Numbers to Lock In

Liquidation Priority (memorize the order)

• Secured, Unsecured, Sub-debt, Preferred, Common: debt ALWAYS before equity; within equity, preferred before common.
• Common holders are last (residual) and often get zero in bankruptcy.
• Limited liability: worst case is total loss of the investment; never personal liability for corporate debts.

Convertible Quick Math

• Conversion ratio = Par Value / Conversion Price. Example: $1,000 par / $50 = 20 shares.
• Parity = Market Price of Convertible / Conversion Ratio. Convert only when the stock trades above parity.

Top Gotchas

• A fixed dividend is not a guaranteed dividend; the board still declares it, and skipping preferred is not a default.
• Ex-dividend date is the first day the stock trades WITHOUT the dividend; set by the listing exchange (or FINRA for over-the-counter stocks), never the company.
• Restricted = HOW acquired (private placement, Regulation D); control = WHO owns them (affiliates). Affiliate status is company-specific.
• Affiliates face volume, manner-of-sale, and filing limits on ALL shares of their own company, even open-market buys; only the holding period drops for open-market shares.
• Only Level 3 ADRs can raise capital; unsponsored ADRs trade over-the-counter only. Eurodollar bonds, Yankee bonds, and currency exchange-traded notes are debt, not equity.

One-Breath Recap

Common is last-in-line ownership with a vote and unlimited upside; preferred trades the vote for a fixed, first-paid dividend that swings with rates. Rights sell cheap and fast, warrants sit above market for years, convertibles flip to common when it pays, and control and restricted shares wait out a holding period before an affiliate can sell.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Equity Securities unit for the complete lesson.