Advanced Diploma of Financial Planning (ADFP) Practice Test

What rights do shareholders of common stock possess?

1. Right to dictate company policy

2. Right to receive dividends and vote on corporate issues

3. Right to guarantee investment returns

4. Right to borrow against their stocks

The correct answer is: Right to receive dividends and vote on corporate issues

Shareholders of common stock possess specific rights that are crucial to their investment and engagement in the company. Among these, the right to receive dividends and the right to vote on corporate issues are fundamental. Receiving dividends means that shareholders can benefit from the company's profits in the form of cash or stock distributions. This aspect of ownership is a major incentive for investing in a company; however, dividends are not guaranteed and depend on the company's performance and decisions made by the board of directors. The right to vote on corporate issues empowers shareholders to have a say in important decisions, such as electing members of the board of directors and approving any major changes to the company's operations or structure. This voting power provides a mechanism for shareholders to influence the management and direction of the company, aligning with their interests as part owners. In contrast to this, dictating company policy is not a right afforded to shareholders; actions like these are typically retained by the management and board of directors. The right to guarantee investment returns is also misleading, as no investment can assure a return due to the inherent risks involved in stock market investing. Lastly, the right to borrow against their stocks is not a direct right of shareholders, although they may be able to use their stock as collateral with financial institutions