Rights of common stockholders

Common stock is an ownership interest in a corporation, and that ownership comes with a defined set of rights. The core six are the right to vote, the right to receive dividends if and when the board declares them, the right to inspect corporate books and records, the right to transfer ownership freely, the right to maintain a proportionate share of ownership, and the right to a residual claim on assets in a liquidation.

Voting rights cover matters such as electing the board of directors, approving mergers, and authorizing additional shares. Voting may be statutory — one vote per share for each open seat — or cumulative, which lets a shareholder pool all votes behind a single candidate and gives minority holders a better chance of winning a seat. Shareholders who cannot attend the annual meeting vote by proxy.

The right to maintain proportionate ownership is the preemptive right. When a corporation issues additional common shares, existing holders may be offered the chance to buy enough of the new shares to keep their ownership percentage intact, protecting them from dilution. This is carried out through a rights offering, in which each shareholder receives one right per share owned. Dividends, by contrast, are never guaranteed on common stock — the board may declare, reduce, or skip them.

The residual claim is the weakest of the rights and the one exams press on. In a liquidation, common stockholders are paid last, behind secured creditors, general creditors, subordinated debt holders, and preferred stockholders. The SIE and Series 6 exams both test these rights directly, often by asking which right a common holder has that a preferred holder does not — voting and preemptive rights are the usual answers.