Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does the pre-emptive right allow common stockholders to do?

1. Sell their shares for a profit

2. Maintain proportional ownership when new shares are issued

3. Vote on corporate decisions

4. Receive higher dividends than preferred stockholders

The correct answer is: Maintain proportional ownership when new shares are issued

The pre-emptive right is a significant privilege granted to common stockholders, allowing them to maintain their proportional ownership in a company when it issues new shares. This right enables existing shareholders the opportunity to purchase additional shares before the company offers these new shares to the public or other investors. This provision is essential in preventing dilution of their ownership stake, which could occur if new shares were issued without giving existing shareholders a chance to buy them. By exercising their pre-emptive rights, common stockholders can ensure that their voting power and financial interest in the company are preserved relative to other shareholders. This aspect is particularly important in maintaining the influence of current investors over corporate governance and future strategic decisions. In contrast, selling shares for a profit refers to the potential for realizing gains from share price increases, but it does not directly relate to the pre-emptive right. Voting on corporate decisions is a fundamental right of shareholders but is separate from the context of share issuance and ownership proportionality. Receiving higher dividends than preferred stockholders is also not relevant, as preferred stock typically receives dividends at a fixed rate, which is distinct from the rights associated with common stockholders.