16 Questions
What is the term used for common stockholders who are entitled to dividend income only after all other obligations have been met?
Residual Owners
What is the main reason investors buy common stocks?
To participate in the profits of a firm
Which of the following is an advantage of stock ownership?
Low purchasing power risk
Why are common stocks subject to various risks?
Including business risk, financial risk, and market risk
What makes it difficult to predict which stocks will go up in value?
Wide swings in profits and general stock market performance
What factor makes common stocks an easy investment to buy and sell?
Low purchasing power risk
Which of the following represents an equity (ownership) position in a firm?
Issuing new shares
What process results in increasing the number of shares outstanding by exchanging a specified number of new shares for each outstanding share?
Stock splits
When a firm executes a stock split, what is the main reason behind it?
To make the stock more attractive to investors by lowering the stock price
What privilege do different classes of classified common stock offer to its holders?
Different voting rights and different dividends
What is the process of repurchasing shares by the issuing firm known as?
Treasury stock
When does a firm normally execute buybacks (treasury stock)?
When they believe that the stock is undervalued and they aim to increase the price of their stock
What represents the conversion of one of a firm’s subsidiaries/divisions to a stand-alone company by distributing stock in the new company to existing shareholders?
Stock spin-offs
What is the process of increasing the number of shares outstanding by exchanging a specified number of new shares for each outstanding (current) share called?
Stock splits
In which type of offering do existing investors have the opportunity to purchase additional shares on a pro-rata basis?
Rights offering
When do firms normally execute stock spin-offs?
When they believe that subsidiary/division is no longer a good fit with future strategies/plans
Test your knowledge about common stock ownership, including the rights and advantages of being a common stockholder. Learn about the potential income and capital gain associated with common stocks.
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