Advanced Diploma of Financial Planning (ADFP) Practice Test

All of the following are characteristics of equity securities EXCEPT?

1. They provide a preferential claim on company assets.

2. They represent ownership in a company.

3. They may yield dividends.

4. They are subject to credit risk.

The correct answer is: They provide a preferential claim on company assets.

The statement that equity securities provide a preferential claim on company assets is not accurate and is why it stands out as the correct choice. Equity securities represent ownership in a company, meaning that shareholders have a claim on the residual assets of the company after debt obligations have been satisfied, but they do not enjoy a preferential claim. That privilege is reserved for debt holders or bondholders, who are prioritized in the event of liquidation. Equity securities, which include common stocks, typically yield dividends as a return on investment, although dividends are not guaranteed and depend on the company's profitability and decisions made by its board. Additionally, equity securities are indeed subject to credit risk, as the performance of stocks can be affected by the financial health and operational performance of the issuing company. In summary, equity shareholders are last in line for asset claims, which underscores why the preferential claim on assets does not apply to them.