Equity Securities: SIE Glossary Terms

These 20 terms cover ownership securities: what shareholders get, how dividends reach them, and how corporate actions change the share count. Start with common stock and preferred stock: the exam builds most equity questions on the contrast between them. Then add the American Depositary Receipt (ADR), the vehicle for owning foreign shares in U.S. markets. The preferred-stock flavors and the dividend-date sequence are where the memorization pays off.

• Common Stock: voting rights, and the last claim in liquidation
• Preferred Stock: a fixed dividend and priority over common
• Cumulative Preferred Stock: missed dividends accrue and must be paid before common gets any
• Participating Preferred Stock: can share in dividends beyond the stated rate
• Callable Preferred Stock: the issuer can buy it back at a set price
• Convertible Preferred Stock: exchangeable into common shares
• Adjustable-Rate Preferred Stock: the dividend resets with a benchmark rate
• Preemptive Right: an existing holder’s right to keep their ownership percentage
• Subscription Right: a short-lived right to buy new shares below market price
• Warrant: a long-term right to buy stock, issued with an above-market exercise price
• American Depositary Receipt (ADR): a U.S.-traded receipt for foreign shares
• Sponsored ADR: an ADR issued with the foreign company’s cooperation
• Ex-Dividend Date: the first day a buyer no longer gets the declared dividend
• Record Date: the day you must be an owner of record to be paid
• Stock Dividend: more shares instead of cash; total value unchanged
• Forward Stock Split: more shares at a lower price, same total value
• Reverse Stock Split: fewer shares at a higher price, same total value
• Treasury Stock: repurchased shares with no vote and no dividend
• Outstanding Shares: issued shares minus treasury stock
• Cumulative Voting: pooling votes on one seat; helps minority shareholders

Common Stock

Common stock is the basic ownership unit of a corporation, giving the holder a vote for the board of directors, limited liability, and the last (residual) claim on assets in a liquidation.

The SIE® tests common stock as a bundle of three linked facts. First, shareholders vote for directors and on major matters such as mergers, but not on whether a dividend is paid. The board of directors declares dividends at its discretion. Second, liability is limited: the most a shareholder can lose is the amount invested; creditors of the corporation cannot reach a shareholder’s personal assets. Third, common stockholders are residual claimants. If the company is liquidated, they are paid last: after employees, taxes, secured and unsecured creditors, bondholders, and preferred stock holders, receiving whatever is left, which is often nothing.

Example: you buy 100 shares at $40, a $4,000 investment. You can cast 100 votes in the next director election, and if the company fails, your maximum loss is the $4,000. If the corporate charter grants a preemptive right, you may also buy shares of any new issue before the public, keeping your percentage ownership intact.

The trap to watch: “shareholders approve the dividend.” They never do. Dividend decisions belong to the board alone.

Practice it: common stock practice questions

Preferred Stock

Preferred stock is an equity security that pays a fixed stated dividend, quoted as a percentage of its $100 par value, and ranks ahead of common stock for dividends and liquidation, generally without voting rights.

The SIE® treats preferred stock as the hybrid security. It is equity, but because the dividend is fixed, its market price behaves like a bond’s: when interest rates rise, the price falls; when rates fall, the price rises. Expect questions that pair this rate sensitivity with the priority ladder: preferred holders receive dividends before common stock holders and stand ahead of them (though behind every creditor and bondholder) in a liquidation. What preferred typically gives up in exchange is the vote and any share in the company’s growth.

Example: a 6% preferred on $100 par pays $6 per share per year. If market rates rise and new preferreds yield 8%, no buyer pays $100 for a $6 stream, so the old share’s price falls toward $75 ($6 ÷ 0.08). The dividend itself never changes. Only the price does.

The variations: cumulative, participating, callable, convertible, and adjustable-rate, each modify one feature of this base contract, and the exam likes asking which type suits a given investor.

Practice it: preferred stock practice questions

Cumulative Preferred Stock

Cumulative preferred stock is preferred stock on which any skipped dividend accumulates as “dividends in arrears,” and all arrears plus the current year’s dividend must be paid in full before the company can pay any dividend on common stock.

The SIE® tests this feature almost entirely through arrears math. The setup: a company skips dividends for a stretch, then wants to resume paying its common shareholders. The question asks what the cumulative preferred holder must receive first. The method: add every missed amount to the current year’s stated dividend.

Example: a company has 5% cumulative preferred ($100 par, so $5 per share per year). It pays nothing in year one and only $2 in year two. Before any common dividend in year three, each cumulative preferred share must receive $13: the $5 missed in year one, the $3 shortfall from year two, and the current year’s full $5.

Contrast this with straight (non-cumulative) preferred stock, where a skipped dividend is simply gone. Because the cumulative feature protects the investor, it usually carries a slightly lower stated rate than an otherwise identical straight preferred. One nuance: arrears are not a debt the company owes on a schedule; they only have to be settled if the board wants to pay common stock holders.

Practice it: preferred stock practice questions

Participating Preferred Stock

Participating preferred stock is preferred stock that pays its fixed stated dividend and can also receive an additional dividend when the board declares an extra payout on common stock in a profitable year.

The SIE® tests participating preferred as the exception to the usual ceiling on preferred income. Straight preferred stock is capped at its stated rate no matter how well the company does; participating preferred keeps the fixed floor but adds upside. The mechanics matter: the extra amount is not automatic. It exists only when the board declares it, according to the participation formula in the stock’s terms, and it rides alongside a strong common dividend. The exam expects you to know both conditions.

Example: a 6% participating preferred on $100 par pays its $6 stated dividend every year it is declared. In a banner year, the board declares a large dividend on common and, under the participation terms, an additional $2 per share to the participating preferred. Its holders receive $8 that year; holders of an otherwise identical straight 6% preferred still receive only $6.

Because the participation feature adds value for the investor, participating preferred generally carries a slightly lower stated rate than a comparable straight preferred, the same trade-off logic the exam applies to cumulative preferred and convertible preferred.

Practice it: preferred stock practice questions

Callable Preferred Stock

Callable preferred stock is preferred stock the issuer may buy back (call) at a set call price after a stated date, a right the issuer exercises when interest rates have fallen.

The SIE® tests the call feature from both sides of the trade. The issuer’s motive: when rates fall, it calls the old high-dividend preferred and refinances by issuing new shares at the lower current rate. The holder’s problem: the shares disappear exactly when reinvesting is least attractive, so the holder bears reinvestment risk; the call proceeds can only be reinvested at the new, lower rates. A second consequence follows: the market price is capped near the call price, because no rational buyer pays much more than what the issuer can redeem it for. In exchange for accepting all this, investors receive a higher stated dividend than a comparable non-callable preferred stock pays.

Example: a company has a 7% preferred ($7 per year on $100 par) callable at $103. Rates fall until new preferreds yield 5%. The issuer calls at $103 and reissues at 5%, saving $2 per share per year. The holder receives $103 but can now earn only about $5 per $100 reinvested, and while rates were falling, the old shares never traded far above $103.

The mirror-image feature is convertible preferred, where the valuable option belongs to the holder and the stated dividend is lower.

Practice it: preferred stock practice questions

Convertible Preferred Stock

Convertible preferred stock is preferred stock the holder may exchange for a fixed number of common shares at a preset conversion price.

The SIE® tests two calculations here. The conversion ratio is par divided by the conversion price: a $100 par preferred convertible at $20 converts into 5 shares of common stock ($100 ÷ $20 = 5). The parity price is the value at which the preferred and the common it converts into are worth the same: multiply the common’s market price by the ratio. If the common trades at $22, parity for the preferred is $110 (5 × $22). A question might then say the preferred is trading at $105 and ask what the holder should notice: the shares are worth $110 as common, so the preferred trades below parity.

The concept question behind the math: why does convertible preferred carry a lower stated dividend than an otherwise identical straight preferred stock? Because the conversion privilege has value of its own. The investor is paid partly in upside, the chance to participate in common-stock growth, so the issuer can offer less fixed income. It is the same trade-off in reverse for callable preferred, where the issuer holds the valuable option and must pay a higher dividend.

Practice it: preferred stock practice questions

Adjustable-Rate Preferred Stock

Adjustable-rate preferred stock is preferred stock whose dividend resets periodically, often quarterly, to track a benchmark interest rate, such as the Treasury bill rate.

The SIE® tests one idea about this security: of all the preferred types, its market price stays the most stable when interest rates swing. The reasoning is the reverse of ordinary preferred stock. A fixed-dividend preferred loses value when rates rise because its payment is frozen while new issues pay more. An adjustable-rate preferred never gets stuck: when rates rise, its dividend resets upward, so the shares keep paying a competitive rate and continue trading near par. When rates fall, the dividend resets downward and the price again has little reason to move. What the investor trades away is income certainty. The dividend amount floats.

Example: an adjustable-rate preferred resets each quarter to the T-bill rate plus a spread. If benchmark rates climb from 4% to 6%, its dividend rises from about $4 to about $6 per $100 par, and the price holds near $100. A fixed 4% preferred in the same market would fall toward $67 ($4 ÷ 0.06), because price is the only thing that can adjust.

Exam questions often present the types side by side: adjustable-rate, straight, callable, and ask which holds its price best in a rising-rate environment. The answer is adjustable-rate.

Practice it: preferred stock practice questions

Preemptive Right

A preemptive right is a right granted in the corporate charter that lets existing shareholders buy shares of a new issue before they are offered to the public, so each holder can maintain their proportionate ownership.

The SIE® tests the preemptive right as an anti-dilution protection. When a company sells additional shares, every existing holder’s percentage of the company shrinks unless they can buy in. The preemptive right closes that gap: it entitles current owners of common stock to purchase enough of the new issue, ahead of outside investors, to keep their stake exactly where it was. Two details the exam checks: the right comes from the charter, not from federal law, and not every corporation grants it.

Example: you own 50,000 of a company’s 1,000,000 outstanding shares, a 5% stake. The company announces a new issue of 200,000 shares. Your preemptive right entitles you to buy 5% of the new issue, or 10,000 shares, before the public can. Buy them and you own 60,000 of 1,200,000 shares: still exactly 5%. Decline, and your stake dilutes to about 4.2%.

In practice the company honors this right through a rights offering, distributing one subscription right per outstanding share, the short-term, tradable instrument the exam pairs with this concept.

Practice it: rights and warrants practice questions

Subscription Right

A subscription right is a short-term instrument, typically living 30 to 45 days, issued one per outstanding share, that lets the holder buy new stock at a subscription price below the current market price.

The SIE® tests three features together. First, the mechanics: in a rights offering, every existing shareholder receives one right per share held, and a stated number of rights plus cash buys one new share. Second, the discount: the subscription price is set below the market price, which is what gives the right its value. Third, the holder’s three choices: exercise the rights and buy the discounted stock, sell the rights (they are transferable and trade on their own), or let them expire worthless. Rights are how a company delivers on the preemptive right in its charter.

Example: a stock trades at $50 and the company runs a rights offering at a $45 subscription price, with 10 rights plus $45 buying one new share. A holder of 1,000 shares receives 1,000 rights, enough to subscribe for 100 new shares at a $5-per-share discount to market. A holder who does not want more stock can sell the 1,000 rights instead of wasting them.

The classic exam contrast is with the warrant: rights are short-term and priced below market at issuance; warrants are long-term and priced above market at issuance.

Practice it: rights and warrants practice questions

Warrant

A warrant is a long-term certificate giving the holder the right to buy the issuer’s stock at a fixed exercise price that is set above the market price at the time the warrant is issued.

The SIE® tests warrants mostly by contrast with subscription rights, and the differences line up cleanly. A warrant is long-term (often five years or more, sometimes perpetual) while a subscription right lives 30 to 45 days. A warrant’s exercise price starts above the current market price, so it has no immediate exercise value and pays off only if the stock climbs; a right’s subscription price starts below market. And where rights go to existing shareholders under a preemptive right, warrants are typically attached to a bond offering as a sweetener: the equity upside makes the package more attractive, letting the issuer sell the bonds with a lower coupon than it could otherwise.

Example: a company’s stock trades at $30. To trim its borrowing cost, the company attaches warrants exercisable at $40 for five years to a new bond issue, and investors accept a 6% coupon instead of the 6.5% the bonds would need on their own. If the stock later reaches $55, each warrant lets its holder buy a $55 share for $40. If the stock never clears $40, the warrants expire worthless; the bondholder still keeps the coupon.

Practice it: rights and warrants practice questions

American Depositary Receipt (ADR)

An American Depositary Receipt (ADR) is a negotiable receipt, issued by a U.S. depositary bank and traded in U.S. dollars on U.S. markets, that represents shares of a foreign company held on deposit abroad.

The SIE® tests one idea about ADRs more than any other: trading in dollars does not remove currency risk. Dividends are declared in the foreign currency and converted to dollars on their way to the holder, so a weakening foreign currency shrinks the payout even when the company pays exactly what it promised. Two related points appear often. Preemptive rights are usually not passed through. The depositary bank sells the rights and credits the cash to holders. And voting rights may be limited or exercised through the bank rather than directly.

Example: one ADR represents five ordinary shares of a Japanese company that declares a ¥500-per-share dividend, so each ADR is owed ¥2,500. At ¥100 to the dollar, that converts to $25.00. If the yen weakens to ¥125 per dollar before conversion, the same dividend arrives as $20.00. Nothing changed in Tokyo. The exchange rate did the damage.

Whether an ADR can list on the NYSE or Nasdaq depends on issuer backing: see sponsored ADR. Dividend timing follows the same ex-dividend date rules as any U.S.-traded stock.

Practice it: ADR practice questions

Sponsored ADR

A sponsored ADR is an American Depositary Receipt program that the foreign issuer itself establishes through a formal agreement with a single U.S. depositary bank.

Because the issuer stands behind the program and commits to SEC reporting, a sponsored ADR can qualify to list on the NYSE or Nasdaq. Its counterpart, the unsponsored ADR, is created by a depositary bank without the issuer’s participation. With no issuer agreement and no reporting commitment, unsponsored ADRs trade over the counter only.

The SIE® usually frames this as a sorting question: which type can be exchange-listed, and which is limited to OTC trading? The issuer’s involvement is the dividing line. Sponsored programs also tend to treat holders better in practice: the issuer typically arranges for voting instructions and shareholder communications to flow through to ADR holders, while unsponsored programs generally do not.

Example: a German automaker signs a deposit agreement with a U.S. bank, registers with the SEC, and lists its sponsored ADR on the NYSE, where investors trade it in dollars alongside domestic stocks. Meanwhile, a broker-dealer sees U.S. demand for a foreign company that never asked for a U.S. listing; a depositary bank creates an unsponsored ADR, and it quotes only in the OTC market.

Remember the pairing: sponsored means issuer-backed and listing-eligible; unsponsored means bank-initiated and OTC only.

Practice it: ADR practice questions

Record Date

The record date is the date, set by the board of directors, on which an investor must be a settled shareholder on the issuer’s books to receive a declared dividend.

The SIE® likes to test who sets which date. The board sets three: declaration date, record date, and payable date. The exchange, or FINRA for OTC stocks, sets the fourth, the ex-dividend date. Keep that split straight and several question variations collapse into one fact.

The mechanics run through settlement. A regular-way equity trade settles in one business day (T+1), and the trade must settle on or before the record date for the buyer to be an owner of record. That means buying at least one business day before the record date. It also means the ex-dividend date now falls on the record date itself. Under the old T+2 cycle it was the day before, and outdated study materials still get this wrong.

Example: the board declares a $1.00-per-share dividend payable July 31 to holders of record on Friday, July 10. Buy 100 shares regular way on Thursday, July 9: the trade settles Friday, you are on the books, and you receive $100 on the payable date. Buy on Friday instead and settlement slips to Monday. The seller collects the dividend.

Practice it: dividends and returns practice questions

Stock Dividend

A stock dividend is a dividend paid in additional shares of the issuer’s stock rather than in cash.

The SIE® tests three linked facts about it. First, a stock dividend is not taxable when received, unlike a cash dividend, which is taxable in the year it is paid. The tax comes later, when the shares are sold. Second, the investor’s total position value and total cost basis do not change; the market price adjusts downward to offset the new shares. Third, because the same dollars now cover more shares, the per-share cost basis is adjusted downward. If a question offers “taxable as ordinary income when received” as an answer for a stock dividend, it is the trap.

Example: you own 100 shares with a cost basis of $50 per share, $5,000 in total. The company pays a 10% stock dividend, so you now own 110 shares. Your total basis is still $5,000, but your new per-share basis is $5,000 ÷ 110 = $45.45. The stock’s market price adjusts down proportionately, so the position is worth the same the moment the dividend is paid. More shares, same value, lower basis per share.

The arithmetic is the same idea as a forward split, just in smaller doses, and eligibility still runs through the record date, exactly as with a cash dividend.

Practice it: corporate actions practice questions

Forward Stock Split

A forward stock split increases the number of shares each investor holds while lowering the share price proportionately, leaving the total value of the position unchanged.

The SIE® tests this almost entirely as arithmetic. The method: multiply the share count by the split ratio, divide the price by it, and confirm the total came out the same. Companies split forward to bring a high stock price down to a range more investors will trade, which can improve liquidity. But no one is richer the morning after. The split is not a taxable event; the total cost basis stays put while the per-share basis drops with the price.

Example, 2:1, you own 100 shares at $80, an $8,000 position. After the split you own 200 shares at $40: still $8,000. If your cost basis was $80 per share, it becomes $40 per share, and the $8,000 total basis is untouched. Example, 3:1, 100 shares at $90 becomes 300 shares at $30; $9,000 before, $9,000 after.

Read the ratio shares-first: 2:1 means two new shares for every one old share. The mirror image is the reverse split, which shrinks the share count instead, and a stock dividend applies the same value-neutral logic in smaller increments.

Practice it: corporate actions practice questions

Reverse Stock Split

A reverse stock split consolidates a shareholder’s existing shares into fewer, higher-priced shares, a 1-for-N exchange that leaves the total value of the position unchanged.

The SIE® tests both the motive and the math. The motive: a company whose stock has slipped below $1 risks being delisted from its exchange for failing the minimum-price listing standard. A reverse split lifts the price back over the bar without changing anything about the business. That is why reverse splits are read as a distress signal, while forward splits usually follow success.

The math: divide the share count by N, multiply the price by N, and confirm the total is unchanged. Like its forward cousin, a reverse split is not a taxable event: total cost basis is unchanged while the per-share basis rises with the price.

Example, 1-for-10: you own 1,000 shares at $0.60, a $600 position. After the reverse split you own 100 shares at $6.00, still $600. Your per-share cost basis is multiplied by ten; your total basis is untouched.

Watch the ratio direction, because it flips between the two split types. A forward split reads shares-first (2:1 means two new for one old); a reverse split reads “1-for-N” (one new share for every N old ones). The value-neutral principle also governs the stock dividend.

Practice it: corporate actions practice questions

Treasury Stock

Treasury stock is stock the issuer previously sold to investors and has since repurchased, holding the shares itself rather than retiring them.

Three facts carry nearly every question. Treasury stock has no voting rights. It receives no dividends. And it reduces shares outstanding, because the working formula is issued shares minus treasury stock equals outstanding shares. The logic behind all three is the same: a company cannot vote for its own directors or pay a dividend to itself.

The SIE® tests treasury stock two ways: through that formula, and through the effect of a buyback. When a company repurchases shares, earnings are spread over fewer outstanding shares, so earnings per share rises even though the company earned nothing extra. Buybacks can also signal that management thinks the stock is cheap, but the EPS mechanics are what the exam checks.

Example: a company has 10,000,000 shares issued and buys back 1,000,000 into its treasury. Outstanding shares fall to 9,000,000. If net income is $18,000,000, EPS rises from $1.80 to $2.00, same earnings, fewer shares. Those 1,000,000 treasury shares cast no votes at the annual meeting and collect none of the dividend the board declares.

Treasury shares can later be reissued (sold back into the market or used for employee compensation) at which point they count as outstanding again.

Practice it: common stock practice questions

Outstanding Shares

Outstanding shares are the shares actually in investors’ hands: issued shares minus treasury stock.

This is the count that matters for almost everything a shareholder does. Votes are cast per outstanding share. Dividends are paid only on outstanding shares. Earnings per share divides net income by outstanding shares. And Rule 144’s volume limit for control-person sales is measured against outstanding shares. The SIE® tests the definition two ways: as straight subtraction, and by asking which share count a given calculation uses. The answer is almost always outstanding, never issued or authorized.

Keep the ladder straight. Authorized shares are the maximum the corporate charter permits. Issued shares are the portion actually sold to investors. Subtract treasury stock, shares the company bought back, and what remains is outstanding.

Example: a company has 30,000,000 shares authorized, 20,000,000 issued, and 2,000,000 held in treasury. Outstanding shares: 20,000,000 − 2,000,000 = 18,000,000. Under Rule 144, an affiliate may sell, in any 90-day period, the greater of 1% of outstanding shares (180,000 here) or the average weekly trading volume over the prior four weeks. In a director election run with cumulative voting, a holder’s voting power is likewise built on the outstanding shares they own.

Practice it: common stock practice questions

Cumulative Voting

Cumulative voting lets a shareholder pool their total votes (shares owned times board seats up for election) and cast them all for a single candidate.

The SIE® tests this as a contrast with statutory voting. Under both methods, total voting power is the same: shares times open seats. The difference is distribution. Statutory voting caps the votes for any one candidate at the number of shares owned: one seat, one allotment. Cumulative voting removes the cap, so a small holder can concentrate everything on one director and actually get that person elected. That is why cumulative voting is the method that benefits minority shareholders, an answer the exam asks for directly and often.

Example: you own 100 shares of a company electing five directors, so you hold 100 × 5 = 500 votes under either method. Statutory: at most 100 votes per candidate, spread across the five seats. Cumulative: all 500 can go to one candidate. A large institution holding 40% of the stock still outvotes you seat by seat, but concentration gives a minority holder a realistic shot at one seat.

Two supporting facts round it out: voting power is built on the outstanding shares you own, and treasury stock never votes at all.

Practice it: common stock practice questions

Drill these terms

When the definitions feel solid, drill them with common stock practice questions and preferred stock practice questions, or browse the full SIE exam glossary.

Equities pair with debt securities for the other core product type, funds & packaged products for how shares get pooled into a fund, and options & derivatives for the contracts written on those same shares. Practice this cluster’s mechanics with the Section 2 practice questions.