Study guide
5.1 Common Stock
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
5.1 Common Stock
Key Takeaways Explain This Topic AI
Common shareholders are owners with voting rights but are last in liquidation.
Cumulative voting helps minority shareholders elect directors.
Preemptive rights protect against dilution in new share issues.
Stock splits and stock dividends change share count and price, not total value.
Investors must buy before the ex-dividend date to receive dividends.
T+1 settlement means the ex-dividend date is usually the record date itself.
Last updated: October 2026
Common stock represents ownership (equity) in a corporation. As partial owners, common stockholders have specific rights and are entitled to participate in the company's success—but they also bear the greatest risk if the company fails.
Characteristics of Common Stock
Common stock is the most basic form of corporate ownership. When you buy shares of common stock, you become a part-owner of the company with several important rights.
Ownership Rights
- Right Description
- Voting Rights Vote on directors, major corporate decisions, stock splits
- Dividend Rights Receive dividends if declared (not guaranteed)
- Residual Claim Entitled to assets after all debts paid in liquidation
- Preemptive Rights May have right to maintain proportional ownership
- Transferability Can freely buy and sell shares on open market
- Limited Liability Maximum loss is limited to amount invested
- In Practice
When Apple holds its annual shareholder meeting, every common stockholder has the right to vote on matters like electing board members, approving executive compensation plans, and ratifying the selection of auditors. Shareholders who cannot attend in person can vote by proxy.
Types of Voting
There are two primary methods of shareholder voting, and the distinction matters significantly for minority shareholders.
Statutory Voting
In statutory voting (also called regular or straight voting), shareholders receive one vote per share for each position being filled. Votes must be cast separately for each director position.
Example : If you own 100 shares and there are 5 director positions:
- You have 100 votes for Position 1
- You have 100 votes for Position 2
And so on...
- You cannot combine votes across positions
- Cumulative Voting
In cumulative voting , shareholders can concentrate their votes on fewer candidates. This method benefits minority shareholders by giving them a better chance of electing at least one director.
Formula : Total Votes = Shares Owned × Number of Positions
Example : If you own 100 shares and there are 5 director positions:
- Total votes = 100 × 5 = 500 votes
- You can allocate all 500 votes to one candidate
- Or split them any way you choose among candidates
- On the Exam
Cumulative voting questions typically ask which voting method benefits minority shareholders. Remember: Cumulative voting allows vote concentration, giving minority shareholders more power to elect at least one sympathetic director.
Preemptive Rights
Preemptive rights give existing shareholders the first opportunity to purchase new shares before they are offered to the public. This protects shareholders from dilution of their ownership percentage.
How Preemptive Rights Work
When a company issues additional shares, existing shareholders with preemptive rights receive subscription rights to buy new shares in proportion to their current ownership.
Example :
- You own 1,000 shares (10% of 10,000 outstanding shares)
- Company issues 2,000 new shares
- With preemptive rights, you can buy 200 shares (10% of 2,000)
- This maintains your 10% ownership stake
- Important Points
- Not all companies grant preemptive rights —check the corporate charter
- Rights are typically exercised at a discount to market price
- Rights have a short expiration period (usually 30-45 days)
- Rights can be sold if shareholder doesn't want to exercise them
- Preferred stockholders generally do NOT have preemptive rights
- Stock Value Concepts
Understanding different measures of stock value is essential for investment analysis.
- Value Type Definition Significance
- Par Value Arbitrary value assigned at issuance Usually $0.01-$1; no economic significance
- Book Value (Assets - Liabilities) ÷ Shares Outstanding Accounting value; may differ from market
- Market Value Current trading price What investors are willing to pay
- Intrinsic Value Estimated true worth Based on fundamental analysis
Book Value Per Share Book Value = Total Assets − Total Liabilities − Preferred Stock Common Shares Outstanding \text{Book Value} = \frac{\text{Total Assets} - \text{Total Liabilities} - \text{Preferred Stock}}{\text{Common Shares Outstanding}} Book Value = Common Shares Outstanding Total Assets − Total Liabilities − Preferred Stock
Book value represents the accounting or "liquidation" value of common equity. If book value significantly exceeds market value, the stock may be undervalued (or the company may have problems not reflected in book value).
- Stock Splits and Stock Dividends
- Forward Stock Splits
A forward split increases the number of shares while proportionally reducing the price per share. Total value remains unchanged.
- Split Ratio Shares Before Shares After Price Before Price After
- 2-for-1 100 200 $100 $50
- 3-for-1 100 300 $90 $30
- 3-for-2 100 150 $60 $40
Why companies split stock : To lower share price and improve liquidity, making shares more accessible to small investors.
Reverse Stock Splits
A reverse split reduces the number of shares while proportionally increasing the price per share.
- Example : 1-for-5 reverse split
- Before: 500 shares at $2 = $1,000
- After: 100 shares at $10 = $1,000
Why companies reverse split : To increase share price, often to maintain listing requirements (many exchanges require minimum prices).
Stock Dividends
A stock dividend distributes additional shares to existing shareholders rather than cash. Like splits, total value is unchanged—you just own more shares at a lower price per share.
Cash Dividend Dates
Understanding the four key dividend dates is crucial for the exam.
- Date Description Key Point
- Declaration Date Board announces dividend Creates legal obligation
Ex-Dividend Date First day stock trades WITHOUT dividend Usually the record date itself (one business day earlier if the record date is not a business day)
- Record Date Date of shareholder registry check Must be owner of record to receive dividend
- Payment Date Dividend is distributed Cash or shares delivered
- The Ex-Dividend Date Rule
As of May 2024, stock trades settle T+1 (one business day after trade). Therefore, the ex-dividend date is now usually set on the record date (or one business day before it if the record date is not a business day).
- Buy BEFORE the ex-date : You receive the dividend
- Buy ON or AFTER the ex-date : You do NOT receive the dividend
- In Practice
If a stock has a record date of Thursday, December 5th:
- Ex-dividend date = Thursday, December 5th
- Buy on Wednesday, December 4th → You GET the dividend (the trade settles on the record date)
- Buy on Thursday, December 5th → You do NOT get the dividend
The stock price typically drops by approximately the dividend amount on the ex-dividend date.
- Key Takeaways
- Common stockholders are owners with voting rights but are last in line in liquidation
- Cumulative voting benefits minority shareholders by allowing vote concentration
- Preemptive rights protect against dilution of ownership percentage
- Stock splits and stock dividends change share count and price but not total value
- Must buy before the ex-dividend date to receive the declared dividend
- T+1 settlement means the ex-date is usually the record date itself