Rule 2 of 14 in this unit2.1.1

2.1.1 Equity Securities

SIE outline 2.1.1

Common Stock Is the Residual Claim

A share of common stock is a claim on whatever remains after every fixed claim against the company has been satisfied: debt, taxes, and any preferred liquidation preference. It has no stated entitlement and no ceiling. NOT "common stock is riskier because its price moves more." It is riskier because of where it stands in the queue. The price behaviour is a consequence of the position, not the definition of it.

The method for this kind of question
  1. 1h45m ÷ 80 items = 78.75 seconds per item. A voting or Rule 144 item should cost about 45.
  2. Three facts decide which formula you are in: does the charter provide cumulative voting? does the issuer report? is the seller an affiliate?
  3. Cumulative voting = shares × seats, and it favours the MINORITY holder. Statutory = your share count per seat.
  4. Rule 144(e) takes the GREATEST of 1% outstanding and the 4-week average weekly volume: never automatically the 1%.
  5. Rule 144(d): 6 months if the issuer reports, 1 year if it does not. The clock runs from acquisition.
  6. Liquidation: sort by claim type, not by how safe the name sounds. A subordinated debenture still outranks preferred stock.
  7. Next: SIE Practice Quiz #5: Equity Securities, every answer explained.

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

An American depositary receipt is issued against a foreign company's stock. Per the SEC's own investor bulletin, how many underlying shares does one ADR represent?

How sure are you?

Correct: A. The SEC's own investor bulletin on international investing states each depositary receipt represents one or more shares of a foreign stock, or several, or a fraction, and the ratio drives the price.
B. The ratio varies by ADR; it is not always one-to-one.
C. No fixed 10-share ratio applies across ADRs generally.
D. An ADR represents an underlying share count (or fraction), not a bare dollar amount.

Unit: SIE outline 2.1.1

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