When you recommend equity, identify what the customer owns and what could produce a return. Common stock represents residual ownership in a corporation. Potential capital appreciation means profiting from a rising share price; dividends distribute company earnings or other available funds. Neither appreciation nor dividends are guaranteed.
Domestic shares represent companies based in your home country. Foreign shares add currency risk, country risk from political or economic events, and disclosure risks from different reporting requirements. A foreign stock can rise locally while a weakening foreign currency reduces your dollar return.
An American Depositary Receipt (ADR) represents an interest in foreign shares held through a U.S. depositary bank. It trades in U.S. dollars and may represent one, multiple or fractional underlying shares. Check the ratio before comparing prices. Dollar trading simplifies access but leaves currency risk intact. Depositary fees can reduce dividend proceeds or create separate charges. ADR bulletin.
For a customer emphasizing income, preferred stock generally provides dividend and liquidation priority over common stock, with limited voting rights. Check the issue's terms to learn which preferences apply.
Common mistakes
- Using the dividend just paid produces $2 ÷ 0.05 = $40 in Example 1. The numerator requires next year's $2.10.
- Calling a 10% stock dividend a 10% investment gain confuses extra shares with extra wealth.
- Giving a statutory voter all 300 votes for one director imports the cumulative voting rule.
Bottom line
- Common stock provides residual ownership with uncertain appreciation and dividends.
- ADRs trade in dollars but retain currency risk and may carry depositary fees.
- Creditors precede preferred shareholders, who precede common shareholders under the issue's terms.
- Voting and preemptive rights depend on applicable law and share terms.
Exam shortcut
Before calculating, identify what the answer must measure: conversion value, firm value, common equity value or value per share. Circle “just paid” and advance that dividend once. Circle “to the firm” and reserve a separate subtraction for net debt and senior claims. For date questions, sketch the relevant clocks. Dividend questions start with distribution size; ISO questions require separate grant and exercise clocks.
The full lesson (about 3,052 words, 20 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B4
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