Benefits, Risk, and the Typical Investor (Equities)

Question 1

Benefits of Common stock

Answer 1

a. Capital appreciation
b. Potential income from dividends
1) May qualify for preferential tax treatment (“qualified dividends”)
c. Liquidity (for listed stocks)
d. Hedge against inflation

Question 2

Risk of Common stock

Answer 2

a. Market risk (systematic)
b. Business, principal, or financial risk (nonsystematic)
c. Price volatility
d. Dividends not guaranteed

Question 3

The typical investor of common stock

Answer 3

a. Growth objective
b. Income expectation for blue chip/mature companies
c. Willing to accept some risk for potential of higher returns
d. Longer time horizon

Question 4

Benefits of preferred stock

Answer 4

a. Fixed income from dividends
1) May qualify for preferential tax treatment (“qualified dividends”)
b. Less volatile than common stock
c. May be convertible, cumulative, or participating
d. Prior claim in liquidation to common stock

Question 5

Risk of preferred stock

Answer 5

a. Market (interest rate) risk
b. Inflation risk
c. Dividends are not guaranteed (no claim to missed dividends except cumulative preferred)
d. May be callable
e. Lower priority in liquidation than bonds

Question 6

The typical investor for preferred stock

Answer 6

a. Fixed income objective (slightly higher yields than comparable debt securities)
b. More conservative (risk averse) than common stockholder
c. Institutional or more sophisticated