A company's chief financial officer bought its stock on an exchange. The shares are fully registered, yet she still cannot sell them the way you can. The stock is not the problem; her position is. Ordinary investors who own equity get one set of rights, insiders face a stricter set of rules, and the exam tests both.
A corporation raises money by selling pieces of ownership in itself, and each piece is a share of common stock. The holder owns a proportional slice of the company's assets and earnings after every prior claim is paid. If you own 1,000 of 100,000 outstanding shares, you own 1% of the company.
Common stockholders usually hold these shareholder rights:
- Voting: You vote for directors and on major changes such as mergers, usually with one vote per share.
- Dividends when declared: The board of directors decides whether to pay a dividend and how much. A common dividend is never promised.
- Preemptive rights: Where the charter or state law grants them, you may buy new shares before outsiders do, so your percentage is not diluted. Not every company grants them.
Common mistakes
- Lesser instead of greater: The affiliate volume limit uses the larger figure. With 120,000 shares (1%) and 110,000 shares (weekly average), the limit is 120,000, not 110,000.
- One year for every issuer: Restricted stock of an issuer that has reported for at least 90 days needs only six months. One year applies to non-reporting issuers, and control stock bought in the market has no holding period.
- Form 144 after the sale: The notice is filed when the order is placed, once three-month sales would exceed 5,000 shares or $50,000.
Bottom line
- Liquidation order runs secured creditors, general unsecured creditors, subordinated debt, preferred stock, then common stock; limited liability caps a shareholder's loss at the amount invested.
- Director votes equal shares times seats; statutory voting caps each candidate at the share count, while cumulative voting allows stacking and helps minority holders.
- Cumulative preferred must pay all arrears plus the current dividend before any common dividend; the conversion ratio is par divided by conversion price, and parity is the ratio times the common price.
- Subscription rights go to existing holders, are priced below market and last weeks; warrants are priced above market at issue, last years and often sweeten bonds; ADRs are dollar receipts for foreign shares and carry currency risk.
Exam shortcut
Read a Rule 144 question in three passes. First, who is selling: an affiliate or not? Second, what do they hold: restricted or control stock? Third, does the issuer file reports? That decides six months or one year. An affiliate faces the full checklist. A non-affiliate faces only the holding period and the public-information condition. Answer choices that say "lesser" or "file after the sale" are traps.
The full lesson (about 4,831 words, 32 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B5
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