Common Stock

Which of the following best describes a common stockholder?

1. A.A holder of a fixed, priority dividendA fixed, priority dividend describes preferred stock, not common.
2. B.A lender with the first claim in a liquidationFirst claim belongs to secured creditors; common stockholders are last.
3. C.A creditor entitled to fixed interest paymentsThat describes a bondholder, who lends rather than owns.
4. D.An owner of the corporation with a residual claim on assets and earningsCorrect — equity means ownership, with a last-in-line residual claim.

Why: Common stock is equity, so its holder is an owner of the corporation with a residual claim — paid only after all creditors and preferred holders in a liquidation.

Compared with common stock, straight preferred stock generally offers...

1. A.A fixed dividend and priority over common, usually without voting rightsCorrect — that is the classic profile of straight preferred stock.
2. B.Higher expected long-term capital gains and full voting rightsGrowth and voting are strengths of common stock, not preferred.
3. C.The last claim in liquidation, behind commonPreferred ranks ahead of common, not behind it.
4. D.A guaranteed dividend that can never be skippedEven preferred dividends are not truly guaranteed; the board can defer them.

Why: Straight preferred pays a fixed, stated dividend and ranks ahead of common for dividends and in liquidation, but it usually carries no voting rights.

Preferred stock generally:

1. A.Always carries voting controlPreferred stock is generally non-voting, and that is the trade the holder accepts in exchange for a fixed dividend and seniority over common. The word always also sets a bar that no share class clears.
2. B.Has unlimited dividend growthGrowing payouts are the common stockholder's upside, since a common dividend can be raised as earnings expand. A preferred dividend is fixed at issuance, which is what gives the security its bond-like behavior.
3. C.Ranks behind bondholders and common equallyHalf right in a useful way: preferred does rank behind bondholders. Where it breaks is the word equally, because preferred sits above common rather than alongside it. The order runs bonds, then preferred, then common, in both dividends and liquidation.
4. D.Pays a fixed dividend and ranks ahead of commonCorrect - fixed dividend, senior to common.

Why: Preferred stock pays a fixed dividend and ranks ahead of common stock in dividends and in liquidation.

The Regulation T initial margin requirement for common stock is currently:

1. A.30%30% is not a Reg T figure at all. It drifts in from house maintenance levels that some firms set above the exchange minimum, which is a different rule applied at a different point in the life of the position.
2. B.25%25% is the familiar long-position maintenance minimum, which governs how far equity may sink after the trade is on. The stem asks what must be deposited at the outset, and initial and maintenance requirements are separate tests at separate moments.
3. C.50%Correct - Reg T initial margin is 50%.
4. D.100%100% is payment in full, which describes a cash-account settlement rather than a margin requirement. It is the ceiling on what any requirement could be rather than a requirement itself, and Reg T deliberately sets the bar below full payment.

Why: Regulation T sets initial margin at 50% of the purchase amount.