Equity Securities — Review for the Series 7 Exam

By Steven M. Rice

To be a corporation, you must have stockholders. Both common and preferred stock are considered equity securities because they represent ownership of the corporation. A majority of most registered representatives’ commission is earned by selling equity securities because, historically, equity securities have outpaced inflation.

You’re expected to understand and calculate questions regarding the following:

  • The specifics of common stock

  • How stock splits and dividends affect stockholders

  • The difference between common stock and preferred stock

  • The reason for American depositary receipts (ADRs)

  • What rights and warrants are

Practice questions

  1. Which of the following does NOT describe treasury stock?

    A. It has no voting rights.

    B. It is stock that was previously authorized but still unissued.

    C. It is issued stock that has been repurchased by the company.

    D. It has no dividends.

    Answer: B. It is stock that was previously authorized but still unissued.

    Choices (B) and (C) oppose each other, so one of them has to be the answer to the question. Treasury stock is stock that was issued and subsequently repurchased by the company. Treasury stock has no voting rights and doesn’t receive dividends.

  2. How much is the price of a stock reduced for a 4-for-3 split?

    A. 10%

    B. 20%

    C. 25%

    D. 33%

    Answer: C. 25%

    When you’re trying to determine how much the price of a stock is reduced for a split, use the following formula:


    A represents the first number, and B represents the second number, so you end up with


  3. Interest rates have just increased. Investors would expect that the prices of their straight preferred stock would

    A. increase

    B. decrease

    C. remain the same

    D. first increase then decrease

    Answer: B. decrease

    Preferred stocks, like bonds, are affected by interest rate changes. Rates and prices have an inverse relationship. Because interest rates have increased, straight preferred stock prices would decrease.

  4. All of the following are characteristics of American depositary receipts EXCEPT

    A. they help U.S. companies gain access to foreign dollars

    B. investors do not receive the actual certificates

    C. investors can’t vote

    D. dividends are paid in U.S. dollars

    Answer: A. they help U.S. companies gain access to foreign dollars

    American depositary receipts (ADRs) are receipts for foreign securities trading in the United States. Therefore, they help foreign companies gain access to U.S. dollars, not the other way around. Investors don’t receive the actual stock certificates; they receive a receipt representing a certain number of shares of the issuer. Investors of ADRs don’t have voting rights. Dividends (if any) are paid in U.S. dollars.