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Difficulty: EasyEquity Securities and Characteristics

An investor seeking a steady income stream with dividend priority over common shareholders, while giving up routine voting rights in corporate governance, would most likely invest in which of the following equity securities?

  1. Preferred stockAnswer
  2. B
    Common stock
  3. C
    American Depositary Receipts
  4. D
    Preemptive rights

Answer

Preferred stock
Preferred stock is suitable for income-focused investors because it offers a fixed dividend rate that takes precedence over common stock dividends. In exchange for this income priority and liquidation preference, preferred stockholders generally do not receive voting rights in routine corporate elections.

Step-by-Step Solution

1
Identify the primary investor objectives and characteristics
The investor requires a fixed income stream, priority in dividend payments, and accepts a lack of corporate voting rights.
Matching specific investor goals against equity features determines the appropriate security.
2
Compare equity security types against the required features
Preferred stock pays a designated dividend that must be distributed prior to any common stock dividends, and typically lacks voting privileges.
Preferred stock functions as an equity instrument with fixed-income characteristics and dividend priority over common stock.

Key Concept

Preferred Stock Characteristics and Dividend Preference
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Topics

Equity Securities and Characteristics

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