Common Stock and the Rights That Come With It

Counting shares

Four terms, and they are not interchangeable.

Authorized shares are the maximum number the corporate charter permits the company to issue. Raising it requires a shareholder vote to amend the charter.

Issued shares are those the company has actually sold or distributed at some point in its life. Issued can never exceed authorized.

Treasury stock is stock the company issued and later repurchased. It is still issued but no longer outstanding. Treasury shares carry no vote, receive no dividends, and are not counted in earnings per share. A company holding treasury stock has not retired it — it may reissue those shares later, for an acquisition or an employee plan, without a new authorization.

Outstanding shares are those currently in the hands of investors: issued minus treasury. This is the number that matters for voting, for dividends and for per-share calculations. When a question gives you authorized, issued and treasury and asks for outstanding, it is testing exactly this subtraction.

Stated value or par value on common stock is an accounting artifact with essentially no economic meaning — often a penny or nothing at all. Do not confuse it with the par value of a bond or of preferred stock, where par is load-bearing.

What a common shareholder gets

Six rights, and the exam asks about all of them.

A pro rata share of dividends, if and when the board declares them. Nothing obliges a board to declare a dividend on common stock; a missed common dividend is not a default.

A vote on major corporate matters — election of directors, mergers, charter amendments, changes in the capitalization, and the issuance of convertible securities.

A preemptive right, if the charter provides one, to subscribe to new issues in proportion to existing ownership so that a shareholder can maintain their percentage. This is where subscription rights come from, covered in lesson 2.3.

Access to the corporate books, in the limited sense of the annual report, the list of shareholders and the minutes of shareholder meetings — not the general ledger.

A residual claim on assets in liquidation. Common stock is last. The order runs: secured creditors, then unpaid wages and taxes, then general creditors including debenture holders, then subordinated debt holders, then preferred shareholders, then common shareholders. A useful compression is that everyone who lent gets paid before anyone who owned.

Limited liability. A shareholder can lose the amount invested and no more. This is why the exam's maximum-loss answer for a long stock position is the purchase price, not an unbounded number — the contrast case being an uncovered call writer, whose loss is genuinely unlimited.

And freely transferable ownership, subject to any restrictions on the particular certificate — which is where Rule 144 arrives in lesson 2.4.

Statutory and cumulative voting

Under statutory voting, a shareholder may cast up to the number of shares owned for each open directorship, and may not concentrate votes on one candidate. Own 100 shares with four seats up for election and you may cast 100 votes for each of four candidates — 400 votes in total, but never more than 100 for any one of them.

Under cumulative voting, the shareholder receives shares multiplied by directorships as a pool and may distribute it any way at all, including all on one candidate. The same 100 shares and four seats give 400 votes, all of which may go to a single candidate.

The substantive point, and the one the exam wants, is that cumulative voting benefits minority shareholders, because it lets a small block concentrate enough votes to elect at least one director rather than being outvoted on every seat. Statutory voting favours the majority holder, who wins every seat.

The arithmetic is always the same: shares times seats for cumulative, shares per seat for statutory. Watch for questions that give shares and seats and ask for 'the maximum number of votes for one candidate' — that is the cumulative number under cumulative voting and the bare share count under statutory.

The dividend timeline under T+1

Four dates, and the ordering changed recently in a way that older study material gets wrong.

The declaration date is when the board declares the dividend and it becomes a liability of the company.

The record date is the date on which you must be on the company's books as a shareholder to receive it.

The ex-dividend date is the date on and after which the stock trades without the dividend. Because the standard settlement cycle under SEC Rule 15c6-1 is now the first business day after the trade — T+1 — a purchase made on the record date settles the following day and therefore misses the record. The ex-date and the record date are now the same business day. To receive the dividend you must buy at least one business day before the record date.

The payable date is when the money is actually distributed, typically a few weeks later.

The stock's price is reduced by the dividend amount on the ex-date, and open buy orders on the books — buy limits and sell stops, the orders placed below the market — are reduced by the dividend on the ex-date unless the customer marked them do-not-reduce. Lesson 7.2 covers the order-adjustment mechanics.

Cash dividends are taxable in the year received; qualified dividends receive long-term capital gains rates if the holding-period conditions are met. Stock dividends and stock splits are not taxable events — they reallocate the same total basis across more shares, so basis per share falls proportionally, and the holding period of the new shares tacks onto the old.

Penny stocks

A penny stock is defined by SEC Rule 3a51-1, and the definition is exclusionary: it is an equity security that is not on the list of exclusions. The exclusions that matter are securities priced at $5.00 or more, securities listed on a national securities exchange, securities of an issuer meeting specified net tangible asset or revenue tests, and a handful of others. So the working shorthand — an unlisted equity under five dollars — is right often enough, but the rule is a list of exclusions rather than a price test.

When the rules apply, Rule 15g-9 requires the broker-dealer, before effecting a transaction, to approve the customer's account for penny stock transactions, obtain a written agreement to the specific transaction, and make a suitability determination based on the customer's financial situation, investment experience and objectives — delivered in writing to the customer. Related rules require delivery of a standardized risk disclosure document, disclosure of the current quotation, and disclosure of the compensation the firm and the representative will receive.

There is an exemption for transactions with an established customer, defined broadly as someone who has held an account with the firm for more than a year or who has made at least three penny stock purchases on separate days involving separate issuers. Unsolicited transactions are also outside the rule. The exam likes the established-customer exemption because it is a specific, memorable carve-out from an otherwise heavy set of requirements.