SIE Exam: Equity Securities
Section 2 — Understanding Products and Their Risks (44% of exam)
Equity securities represent ownership interests in corporations and are a major component of the SIE exam's product knowledge section. This topic covers common stock, including shareholder rights such as voting (statutory vs. cumulative), preemptive rights, and the residual claim in liquidation. You must understand the differences between authorized, issued, outstanding, and treasury shares, as well as how stock splits and stock dividends affect share count and price. Preferred stock is tested extensively, including cumulative, participating, convertible, callable, and adjustable-rate varieties. The exam covers American Depositary Receipts (ADRs) as a vehicle for investing in foreign companies on U.S. exchanges, along with the associated currency and political risks. Rights offerings and warrants are important concepts — know how subscription prices work and how warrants differ from rights in terms of duration and exercise price. Calculating book value per share, understanding parity prices for convertible securities, and recognizing the impact of corporate actions on equity positions are all areas FINRA tests. This is one of the highest-weighted topics within the Understanding Products section.
Key Concepts
Common Stock
Represents ownership in a corporation with voting rights and a residual claim on assets. Common stockholders are last in line during liquidation.
Preferred Stock
A class of stock that receives dividends before common stockholders and has priority in liquidation. Generally does not carry voting rights.
Cumulative Preferred Stock
Requires that any skipped dividends (arrearages) must be paid in full before common stockholders can receive dividends.
American Depositary Receipt (ADR)
Receipts issued by U.S. depositary banks representing shares of foreign companies. They trade on U.S. exchanges in U.S. dollars, exposing holders to currency and political risk.
Preemptive Rights
Allow existing shareholders to purchase new shares before they are offered to the public, maintaining their proportional ownership in the corporation.
Treasury Stock
Shares that were once issued and outstanding but have been repurchased by the corporation. Treasury stock does not vote and does not receive dividends.
Stock Split
A corporate action that increases the number of shares while proportionally decreasing the price per share. A 2-for-1 split doubles shares and halves the price.
Practice Questions
Question 1 of 4
A common stockholder's right to maintain their proportional ownership when the company issues new shares is known as:
Question 2 of 4
Which of the following voting methods allows a minority shareholder the best opportunity to elect at least one director to the board?
Question 3 of 4
An investor holds convertible preferred stock with a par value of $100 and a conversion ratio of 4:1. If the common stock is currently trading at $30, what is the parity price of the preferred stock?
Question 4 of 4
A 10% stock dividend is declared on a stock trading at $80. An investor who holds 100 shares before the dividend will hold how many shares at approximately what price after the dividend?
12+ more practice questions
Get full access to AI-graded practice, timed mock exams, and progress tracking.
Start Practicing FreeFrequently Asked Questions
What types of equity securities are on the SIE exam?
The SIE covers common stock, preferred stock (cumulative, participating, convertible, callable, adjustable-rate), ADRs, rights, warrants, and treasury stock. You need to know each type's characteristics, risks, and how corporate actions like splits and dividends affect them.
How do stock splits work on the SIE exam?
Stock splits increase the number of shares while proportionally decreasing the price. In a 3-for-1 split, 100 shares at $150 become 300 shares at $50. Total value remains the same. Reverse splits work in the opposite direction, reducing shares and increasing price.