Preferred Stock – Series 7 Exam

🧾 Preferred Stock – Series 7 Exam
📘 Key Features, Types, and Important Concepts for the Series 7 Exam

Preferred stock is an important topic on the Series 7 exam, appearing frequently in questions about equity securities, income strategies, and corporate structure. Here’s a full breakdown to help you master preferred stock concepts for the test.

🎯 1. What is Preferred Stock?

Preferred stock is a type of equity security that represents ownership in a corporation but with characteristics more similar to debt than to common stock.

Key Features:

• Priority over common stock for dividends and liquidation.
• Fixed dividend payments (typically stated as a percentage of par value).
• No voting rights (in most cases).
• Less appreciation potential than common stock.
• Higher claim in case of corporate bankruptcy (but still subordinate to bondholders).

🎯 2. Types of Preferred Stock

🎯 3. Preferred Stock Dividends

Preferred dividends are usually:

• Fixed: For example, a 5% preferred stock pays 5% of its par value annually.
• Quoted based on par value (usually $100 for preferred shares).

Example:
A 6% preferred stock with $100 par value pays $6 per year in dividends, typically split into $1.50 per quarter.

🎯 4. Important Exam Concepts

Dividend Priority:

Preferred stockholders are paid before common stockholders but after bondholders in liquidation.

Sensitivity to Interest Rates:

Preferred stock prices behave like bonds:

• Interest rates up → Preferred prices down.
• Interest rates down → Preferred prices up.

Risk Factors:

• Inflation risk (fixed dividends lose purchasing power during inflation).
• Interest rate risk (price inversely related to market interest rates).
• Credit risk (issuer’s ability to pay dividends).

🎯 5. Convertible Preferred Stock Calculations

Convertible preferred stock can be exchanged for common stock at a conversion ratio.

Formula:

Conversion Ratio=Par Value of PreferredConversion Price\text{Conversion Ratio} = \frac{\text{Par Value of Preferred}}{\text{Conversion Price}}

Example:

• $100 par preferred stock
• Conversion price: $25
• Conversion ratio = 100 ÷ 25 = 4 shares of common stock

If the common stock price rises above the effective conversion price, conversion becomes attractive.

🎯 6. Callable Preferred Stock Concepts

Issuers may call preferred shares when:

• Interest rates fall (so they can reissue preferred stock at a lower rate).
• Call price is usually above par to compensate investors.

Preferred shares with call features offer higher yields to offset call risk.

🎯 7. Summary: Why Preferred Stock Matters for Series 7

Know the structure, types, dividend features, and risk profile of preferred stocks for Series 7. Expect scenario-based questions where you’ll need to identify the most suitable investment given a client’s income needs, risk tolerance, or interest rate expectations.

🎓 Need more Series 7 exam prep?
Access complete study guides, timed practice tests, and quick-reference charts at:
👉 https://finra-exam-mastery.com

Study smart. Master the details. Pass with confidence!