Equity Securities

Equity Securities: Investment Vehicle Characteristics Why this matters on the exam: Equity securities questions appear consistently within Section II (Investment Vehicle Characteristics), which represents approximately 25% of the exam — understanding how common and preferred stock work, how dividends are processed, and how equity is valued is essential for earning those points. --- ## Overview: What Are Equity Securities? Equity securities represent ownership interests in a corporation. When you buy stock, you are purchasing a fractional ownership claim on the company's assets and earnings. Unlike debt securities (bonds), equity holders are not creditors — they are residual claimants, meaning they get paid last if the company is liquidated. The two main types tested on the Series 65 are common stock and preferred stock. --- ## Common Stock Common stockholders are the true owners of a corporation. Their key rights include: - Voting rights — elect the board of directors, vote on major corporate actions - Dividend rights — receive dividends *if and when* the board declares them (not guaranteed) - Preemptive rights — the right to maintain their proportional ownership when the company issues new shares (also called subscription rights or rights offerings) - Residual claim — last in line during liquidation, after creditors and preferred shareholders ### Stock Splits A stock split increases the number of shares outstanding while proportionally reducing the price per share. The shareholder's total investment value does not change immediately. > Example: You own 100 shares at $60/share ($6,000 total). A 2-for-1 split gives you 200 shares at $30/share — still $6,000 total. A reverse split does the opposite: reduces share count and raises price proportionally. Companies often use reverse splits to avoid being…