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

What is preferred stock?

1. A type of common stock with higher risk

2. A type of fixed-income security with paid-out dividends before common stock

3. Stocks that guarantee a buy-back option

4. Stock that can only be sold to accredited investors

The correct answer is: A type of fixed-income security with paid-out dividends before common stock

Preferred stock is a type of fixed-income security that offers certain advantages over common stock, primarily in the form of dividends. One of the defining features of preferred stock is that it typically provides a fixed dividend payment, and these dividends are paid out to preferred shareholders before any dividends are distributed to common shareholders. This priority in dividend payments is what categorizes preferred stock as a hybrid security, combining aspects of equity and debt. Unlike common stockholders, preferred stockholders usually do not have voting rights, but they do enjoy greater stability when it comes to income generation through dividends. Additionally, in the event of a company's liquidation, preferred shareholders have a higher claim on assets than common stockholders, although they still rank below debt holders. Understanding preferred stock is essential for investors looking for more secure investment options that still offer some equity upside without the full volatility of common stocks.