SIE (Training Consultants v3.5, 2025): Ch. 1 Equity Securities, Sec. 1 - Fundamentals of Common Stock

Common Stock

A security representing ownership (equity) in a corporation; shareholders have a claim on the corporation’s assets and profits.

Shareholder

An individual or entity that owns shares of a corporation’s stock, giving them an ownership interest in the company.

Equity Security

A security that represents ownership in a company, such as common stock.

Dividend

A distribution of a portion of a corporation’s profits to its shareholders, declared by the Board of Directors.

Capital Gain

A profit realized when an investor sells a stock for more than the purchase price.

Capital Loss

A loss realized when an investor sells a stock for less than the purchase price.

Limited Liability

Feature of common stock where shareholders cannot be held responsible for the corporation’s debts beyond their investment.

Stock Certificate

A document that certifies ownership of a specific number of shares of a corporation’s stock.

Registered Form

Stock registered in the shareholder’s name and recorded on the company’s books.

Street Name

Stock registered in the name of a broker-dealer holding it for the benefit of the customer (beneficial owner).

Proportionate Share of Assets

The right of common shareholders to receive a portion of a company’s assets upon liquidation, after senior claims are satisfied.

Regular / Statutory Voting

A voting method where shareholders receive one vote per share per director and cannot allocate more than one vote per candidate.

Cumulative / Block Voting

A voting method where shareholders receive one vote per share times the number of directors being elected and may allocate votes as desired.

Supervoting Shares

A type of stock that gives certain shareholders more votes per share than regular common stock, allowing control retention.

Normal Round Lot

Standard unit of trading for common stock, usually 100 shares.

Callable Stock

A type of stock that can be redeemed by the issuing corporation; common stock is never callable.

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Questions and Answers

What is common stock?

A security representing ownership in a corporation, giving shareholders a claim on assets and profits.

Why do investors buy common stock?

To make a profit through dividends and/or capital gains.

Can corporations be required to pay dividends to common shareholders?

No, dividends are discretionary and declared by the Board of Directors.

What is the maximum loss potential for a common shareholder?

The loss of the entire investment in the stock.

What rights do common shareholders have?

Receive stock certificates, inspect certain corporate books, receive dividends, share in assets upon liquidation, vote for the Board of Directors.

What is the order of asset distribution upon liquidation?

Taxes → Secured debt → Unsecured debt → Preferred stockholders → Common stockholders.

How can shareholders vote if they cannot attend the meeting?

By proxy, using an absentee ballot.

What is regular/statutory voting?

One vote per share per director, cannot allocate more than one vote per candidate; favors large shareholders.

What is cumulative/block voting?

One vote per share times number of directors, votes can be allocated freely; favors minority shareholders.

What are supervoting shares?

Shares that give certain shareholders more than one vote per share, allowing control retention.

What rights do common shareholders NOT have?

Entitlement to dividends, voting on company dissolution, voting for officers or senior management.

What has historically been the best hedge against inflation?

Common stock.

What economic factors negatively affect common stock?

Higher taxes, rising interest rates, decreases in GDP, high unemployment.

What economic factors positively affect common stock?

Lower taxes, lower interest rates, increases in GDP, low unemployment.

What is a normal round lot for common stock trading?

100 shares.

Is common stock ever callable?

No, common stock is never callable.