Common Stock Ownership & Rights — Q&A
Questions
Q1. What does common stock represent, and what formal term describes this type of security?
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Ownership in the issuer. Common stock is an equity security (equity = ownership). Buying shares makes you a stockholder with a partial ownership stake.
Q2. An investor buys Ford at $10, sells at $25, and received $1/share in dividends while holding. What are the two return components and the total profit per share?
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Capital appreciation ($15/share) and cash dividends ($1/share) = $16/share total. Capital appreciation requires selling; dividends are company profit distributed to shareholders.
Q3. ⚠️ Who decides whether common stock dividends are paid — stockholders or the Board of Directors?
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The Board of Directors (BOD). Stockholders do not vote on dividend payments. If declared, shareholders receive a pro-rata share (5% ownership → 5% of dividends).
Q4. Which SEC filings must publicly traded companies provide for stockholders to inspect books and records, and which is audited?
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10-K (annual, audited) and 10-Q (quarterly, unaudited). The SEC enforces reporting requirements on publicly traded companies.
Q5. A company issues more stock. What right may let an existing holder buy a proportionate share of new issuance before others, and what corporate action reduces proportionate ownership?
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Pre-emptive rights (via a pre-emptive rights offering) may maintain proportionate ownership — but ⚠️ not all issuers must offer this. Dilutive actions reduce proportionate ownership; rights offerings avoid dilution.
Q6. List the corporate liquidation priority order from first to last claimant (full chain).
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(1) Unpaid wages → (2) Unpaid taxes → (3) Secured creditors → (4) Unsecured creditors → (5) Junior unsecured creditors → (6) Preferred stockholders → (7) Common stockholders. Stockholders are last; common stockholders often receive nothing in bankruptcy.
Q7. Why do growth companies like Amazon typically avoid paying cash dividends?
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They retain profits as retained earnings to reinvest in expansion, hiring, and new industries. Growth companies offer capital appreciation but generally no income from dividends.
Q8. How do supply and demand affect common stock prices?
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Prices rise when more shares are purchased than sold; prices fall when more are sold than purchased. Demand is usually influenced by the company’s perceived success.
Q9. What is the general exception to a stockholder’s right to freely transfer ownership?
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Restricted (unregistered) stock — covered later in the unit. Otherwise, common stock can generally be bought and sold freely.
Sources
| # | Source | Publisher |
|---|---|---|
| 1 | Achievable Series 65 — chapter 1.1.1 | Achievable (course text) |