Common Stocks and Stock Ownership Quiz

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Questions and Answers

What do common stockholders expect in terms of dividend income?

Guaranteed profit distribution

Dividend income without any risk

Dividend income before other obligations are met

Dividend income after all other obligations have been met (correct)

Which of the following is an advantage of stock ownership?

Difficult to find price and market information

Protection from inflation

Low purchasing power risk (correct)

High unit cost per share of stock

What kind of risks are common stocks subject to?

Interest rate risk and political risk

Market risk and liquidity risk

Credit risk and liquidity risk

Business risk and financial risk (correct)

Why are common stocks considered an easy investment to buy and sell?

Price and market information is easy to find in financial media Signup and view all the answers

What do common stocks provide opportunity for?

High returns compared to other investments Signup and view all the answers

What are common stockholders known as?

Residual Owners Signup and view all the answers

What is the process of increasing the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share called?

Stock splits Signup and view all the answers

When a firm executes a stock spin-off, what does it typically indicate?

The subsidiary/division is no longer a good fit with future strategies/plans Signup and view all the answers

In which market do existing investors participate in a pro-rata basis through a rights offering?

Primary market Signup and view all the answers

What is the process of repurchasing shares by the issuing firm known as?

Treasury stock Signup and view all the answers

Under what circumstances do firms execute stock splits?

When they believe the stock is overvalued Signup and view all the answers

What does classified common stock refer to?

Different classes of common stock, each offering different privileges and benefits to its holders Signup and view all the answers

In a 2-for-1 stock split, how many shares would an investor with 200 shares have after the split?

400 Signup and view all the answers

What is the main reason for firms to execute buybacks (treasury stock)?

They believe the stock is undervalued Signup and view all the answers

What does a public offering in the primary market involve?

Public investors participating in a pro-rata basis through a rights offering Signup and view all the answers

What are the three choices to sell securities in the primary market?

Public offering, Rights offering, Private Placement Signup and view all the answers

Study Notes

Common Stockholders Expectations

Common stockholders expect to receive dividend income, although the dividend payments are not fixed and may vary.

Advantages of Stock Ownership

One advantage of stock ownership is the potential for long-term capital appreciation.

Risks of Common Stocks

Common stocks are subject to various risks, including market risk, liquidity risk, and business risk.

Ease of Buying and Selling Common Stocks

Common stocks are considered an easy investment to buy and sell because they are widely traded on stock exchanges, allowing for easy marketability.

Opportunities Provided by Common Stocks

Common stocks provide investors with the opportunity to participate in the growth and profits of the company.

Common Stockholders

Common stockholders are known as owners or shareholders of the company.

Stock Splits

The process of increasing the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share is called a stock split.

Stock Spin-offs

When a firm executes a stock spin-off, it typically indicates that the company is divesting a subsidiary or division to focus on its core business.

Rights Offering

In a rights offering, existing investors participate in a pro-rata basis in the primary market.

The process of repurchasing shares by the issuing firm is known as a share buyback or treasury stock.

Reasons for Stock Splits

Firms execute stock splits under circumstances such as when the stock price becomes too high, making it less attractive to small investors.

Classified Common Stock

Classified common stock refers to the classification of common stock into different classes, such as Class A and Class B shares, with different voting rights and dividend payments.

2-for-1 Stock Split

In a 2-for-1 stock split, an investor with 200 shares would have 400 shares after the split.

Reasons for Buybacks

The main reason for firms to execute buybacks is to increase the value of remaining shares and to return capital to shareholders.

Public Offering

A public offering in the primary market involves the initial sale of securities by the issuing firm to raise capital.

Selling Securities in the Primary Market

The three choices to sell securities in the primary market are public offerings, private placements, and rights offerings.

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Description

Test your knowledge about common stocks and stock ownership with this quiz. Learn about the features and advantages of common stocks, as well as the rights and claims of common stockholders.