Key Takeaways
- Common stockholders are the true owners of a corporation with voting rights.
- Shareholders vote for directors using either statutory or cumulative voting.
- Preemptive rights allow shareholders to maintain proportional ownership when new shares are issued.
- Dividends are not guaranteed - must be declared by the board of directors.
- Ex-dividend date is 1 business day before record date; must buy BEFORE ex-date to receive dividend.
- In liquidation, common stockholders are LAST in priority after creditors and preferred stockholders.
- Stock splits change share count and price but NOT total value of the position.
Common Stock
Common stock represents equity ownership in a corporation. Common stockholders are the true owners of the company, bearing both the highest potential for returns and the greatest risk.
Ownership Rights of Common Stockholders
Common stockholders enjoy several important rights as owners of the corporation:
| Right | Description | Key Details |
|---|---|---|
| Voting Rights | Vote on corporate matters | Directors, mergers, major changes |
| Dividend Rights | Receive dividends if declared | Not guaranteed; board discretion |
| Preemptive Rights | Maintain ownership percentage | Buy new shares before public |
| Inspection Rights | Access corporate records | Review books and minutes |
| Residual Claim | Assets after all debts paid | Last in liquidation priority |
| Right to Transfer | Sell or give away shares | Subject to any restrictions |
Voting Rights and Methods
Common stockholders typically get one vote per share owned. Two voting methods exist:
Statutory (Regular) Voting
- One vote per share, per director position
- Each director voted on separately
- Favors majority shareholders
Cumulative Voting
- All votes can be cast for one director
- Total votes = Shares × Number of positions
- Helps minority shareholders elect a representative
Example: An investor owns 100 shares and 4 directors are being elected.
- Statutory voting: Can cast 100 votes for each of the 4 positions
- Cumulative voting: Can cast all 400 votes (100 × 4) for one candidate
Exam Tip: Cumulative voting benefits MINORITY shareholders by allowing them to concentrate votes on a single candidate.
Preemptive Rights
Preemptive rights protect existing shareholders from dilution of their ownership percentage.
How Preemptive Rights Work
- Company announces new share issuance
- Existing shareholders receive rights (warrants)
- Rights allow purchase of new shares proportionally
- Rights can be exercised, sold, or allowed to expire
Example: An investor owns 1,000 shares (10% of 10,000 total shares). Company issues 5,000 new shares. With preemptive rights, the investor can purchase 500 new shares to maintain their 10% ownership.
Rights vs. Warrants
| Feature | Rights | Warrants |
|---|---|---|
| Duration | Short-term (weeks) | Long-term (years) |
| Price | Below market | At or above market |
| Purpose | Maintain ownership | Incentive/sweetener |
| Source | Company-issued | Company-issued |
Dividends
Dividends are distributions of corporate profits to shareholders. They are NOT guaranteed and must be declared by the board of directors.
Types of Dividends
| Type | Description | Tax Treatment |
|---|---|---|
| Cash Dividends | Most common; paid in cash | Taxable as income |
| Stock Dividends | Additional shares issued | Not taxable until sold |
| Property Dividends | Company assets or products | Taxable at FMV |
| Liquidating Dividends | Return of capital | Reduces cost basis |
Important Dividend Dates
Understanding dividend dates is CRITICAL for the exam:
| Date | What Happens | Who Sets It |
|---|---|---|
| Declaration Date | Board announces dividend | Board of Directors |
| Ex-Dividend Date | First day stock trades WITHOUT dividend | Exchange/FINRA |
| Record Date | Must be owner of record | Company |
| Payment Date | Dividend is actually paid | Company |
The Ex-Dividend Rule
The ex-dividend date is set 1 business day BEFORE the record date. This is because stock trades settle in 1 business day (T+1).
To receive a dividend: Buy stock BEFORE the ex-dividend date If you buy ON or AFTER the ex-date: Seller receives the dividend
Exam Tip: The stock price typically drops by approximately the dividend amount on the ex-dividend date because new buyers won't receive that dividend.
Stock Splits and Reverse Splits
Stock splits change the number of shares and price but do NOT change the total value of an investor's position.
Forward Stock Splits
| Split | Shares Effect | Price Effect | Example (100 shares @ $60) |
|---|---|---|---|
| 2-for-1 | Doubles | Halved | 200 shares @ $30 |
| 3-for-1 | Triples | One-third | 300 shares @ $20 |
| 3-for-2 | 1.5× | Two-thirds | 150 shares @ $40 |
Reverse Stock Splits
Reverse splits reduce shares and increase price. Often done to meet exchange listing requirements (minimum price).
| Split | Shares Effect | Price Effect | Example (1000 shares @ $2) |
|---|---|---|---|
| 1-for-10 | Divided by 10 | × 10 | 100 shares @ $20 |
| 1-for-5 | Divided by 5 | × 5 | 200 shares @ $10 |
Key Point: Total value remains UNCHANGED after any split.
Liquidation Priority
In bankruptcy, common stockholders are LAST in the order of claims:
- Secured creditors (bondholders with collateral)
- Unsecured creditors (wages, taxes, general creditors)
- Subordinated debt holders
- Preferred stockholders
- Common stockholders (often receive nothing)
Exam Tip: Common stockholders have "residual claims" - they get whatever is left AFTER everyone else is paid, which is often nothing in bankruptcy.
An investor owns 100 shares of XYZ stock at $60 per share. After a 3-for-1 stock split, the investor will have:
Which voting method most benefits minority shareholders?
To receive a declared cash dividend, an investor must purchase the stock:
In a corporate bankruptcy, common stockholders are paid:
3.2 Preferred Stock
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