CFA Level I · CFA Level I Exam · Equity Instrument Features
Compared with a company's callable preference shares, its common shares are most likely to offer investors:
Common shares offer residual claims with unlimited upside potential. Holders receive what remains after creditors and preferred holders are paid, so gains are not capped. Fixed priority dividends and call prices that limit price appreciation are characteristics of callable preference shares instead.
- Aa fixed dividend with priority over other shareholders
- Ba call price that caps the potential gain
- Cresidual claims with unlimited upside potentialCorrect
Explanation
Common shareholders hold a residual claim on earnings and assets, so their gains are not capped, but they rank last and dividends are not guaranteed. A fixed dividend with priority and a call price that limits upside are features of preference shares.
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