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1.1 Common Stock Basics

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Series 7 General Securities Representative

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1 Introduction

About the Series 7 How to Use This Guide

2 Chapter 1: Equity Securities

1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities

3 Chapter 2: Debt Securities

2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks

4 Chapter 3: U.S. Government & Agency Securities

3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments

5 Chapter 4: Municipal Securities

4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules

6 Chapter 5: Investment Companies

5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation

7 Chapter 6: Variable Products & Annuities

6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance

8 Chapter 7: Alternative Investments & DPPs

7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives

9 Chapter 8: Options

8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements

10 Chapter 9: Customer Accounts

9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts

11 Chapter 10: Retirement & Education Plans

10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation

12 Chapter 11: Securities Markets & Trading

11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants

13 Chapter 12: Rules, Regulations & Ethics

12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct

1.1 Common Stock Basics

Key Takeaways Explain This Topic AI

Common stock represents equity ownership and a residual claim on assets and earnings.

Shareholders hold voting rights and may receive dividends, but dividends are never guaranteed.

In liquidation, common stockholders are paid last: after secured creditors, bondholders, and preferred holders.

Authorized, issued, outstanding, and treasury shares are distinct categories with different rights.

Limited liability caps a shareholder's maximum loss at the amount invested.

Last updated: October 2026

What Is Common Stock?

Common stock is a security representing proportional ownership in a corporation. Buyers become shareholders with a claim on the firm's residual assets and earnings. On the Series 7 exam (125 scored questions, 225 minutes, a scaled passing score of 72, administered by FINRA at Prometric centers), equity securities are a high-frequency topic, so master these fundamentals first.

Unlike bondholders, who are creditors , common stockholders are equity owners . This distinction drives liquidation priority: in a corporate dissolution, holders are paid in a strict order. The exam tests this sequence constantly.

  • Liquidation Priority (Memorize the Order)
  • Secured creditors (e.g., mortgage bondholders)
  • Unsecured creditors (debentures, general creditors, wages, taxes)
  • Subordinated debenture holders
  • Preferred stockholders
  • Common stockholders (last)

This residual claim is why common stock carries the highest risk and the greatest growth potential of the three core securities.

Shareholder Rights

  • Right Description
  • Voting Elect the board; approve mergers, stock splits, charter changes
  • Dividends Receive cash or stock dividends when declared by the board
  • Preemptive Maintain proportional ownership when new shares are issued
  • Inspection Review the annual report and list of shareholders
  • Residual claim Receive remaining assets after all creditors and preferred
  • Transfer Freely sell or gift shares

Note that common holders do not vote on the dollar amount of a cash dividend, and they cannot compel the board to declare one.

Voting Methods

Shareholders generally receive one vote per share per board seat. Two methods appear on the exam:

Statutory voting allots one vote per share per seat, applied separately to each seat. With 100 shares and three open directorships, you may cast up to 100 votes for each of the three candidates, but no more than 100 for any one. Statutory voting favors large/majority holders.

Cumulative voting lets you aggregate votes and pile them onto fewer candidates: total votes = shares × seats. With 100 shares and three seats you control 300 votes that can all go to one nominee. Cumulative voting favors minority shareholders because it improves their odds of seating a representative. Total Cumulative Votes = Shares Owned × Seats Open \text{Total Cumulative Votes} = \text{Shares Owned} \times \text{Seats Open} Total Cumulative Votes = Shares Owned × Seats Open

Proxy voting lets absent shareholders authorize someone to vote their shares. Public companies must solicit proxies before annual meetings under SEC rules; a proxy is essentially an absentee ballot, not a transfer of ownership.

Share Classifications

  • Term Definition
  • Authorized Maximum shares the charter permits the firm to issue
  • Issued Shares actually sold to the public over time
  • Outstanding Issued shares currently held by investors (vote, get dividends)

Treasury Issued shares repurchased by the firm (no vote, no dividend) Outstanding = Issued − Treasury \text{Outstanding} = \text{Issued} - \text{Treasury} Outstanding = Issued − Treasury

Firms buy back stock to boost earnings per share, fund employee stock plans, support the price, or deter takeovers. Treasury stock is not used in EPS calculations and carries neither vote nor dividend.

Par Value vs. Market Value

Par value for common stock is an arbitrary bookkeeping figure (often $0.01 or $1) with no relation to worth; it matters mainly for the corporation's balance sheet. Market value is the live trading price set by supply and demand and is what your clients actually pay or receive.

Limited Liability — A Common Trap

Under limited liability , a shareholder's maximum loss equals the amount invested; personal assets are shielded from corporate debts. Contrast this with a general partnership, where partners bear unlimited personal liability. The exam often pairs this concept with the residual claim to test whether you understand that "last in line" does not mean "liable for more." Even if the corporation goes bankrupt owing far more than its assets, a shareholder who paid $5,000 for stock can lose no more than that $5,000.

Classes of Common Stock

Many companies issue more than one class of common stock to separate economic ownership from voting control. A typical arrangement gives founders Class A super-voting shares (e.g., 10 votes each) while public investors buy Class B shares with one vote each. Both classes usually share equally in dividends. The exam wants you to recognize that voting power and dividend rights can be split across classes, and that a class with reduced or no votes still has the residual claim and dividend participation.

Statement of Ownership and Transfer

Most shares today are held in book-entry form (electronic) rather than as paper certificates. Ownership is recorded by the transfer agent , which cancels old certificates and issues new ones, and the registrar , which audits that the number of shares outstanding never exceeds the authorized amount. Stock is freely transferable, which is one reason it is more liquid than a partnership interest. When you advise a client to sell, settlement and re-registration flow through these agents.

Common Stock Risks and Rewards

  • Reward Corresponding Risk
  • Capital appreciation potential Market (systematic) risk — prices fall in downturns
  • Dividend income when declared No guarantee; board can cut or omit dividends
  • Voting voice in the company Voting power diluted by new share issuance
  • Liquidity in public markets Business risk — the firm can fail entirely

The exam frames suitability around this trade-off: common stock suits investors seeking growth who can tolerate volatility and the residual-claim risk, not those needing guaranteed income or principal protection.

Exam Focus

The exact liquidation order (common is always last ).

Statutory vs. cumulative voting, and which protects minority holders.

Outstanding = issued − treasury (treasury shares neither vote nor receive dividends).

Dividends are discretionary; there is no guaranteed return on common stock.