Shareholder Rights on the SIE Exam: Voting & Dividends (Part 1)

SIE EXAM PREP8 min read

When you own a share of common stock you own a piece of a company — and ownership comes with rights. The SIE does not ask you to admire those rights. It asks what they entitle you to, how a dividend moves the stock, and how voting actually works. Part 1 covers the two the exam leans on hardest: voting and dividends.

I am Mike Finnen. I spent 37 years as a trader and principal on the floor of the New York Stock Exchange. This is Part 1 of shareholder rights for the SIE — there is enough here for two videos, so I have split it. We start with dividends and voting.

You are an owner, not a lender

When you own common stock you own equity, and equity is ownership. That one idea drives every right in this article. A bondholder lent the company money; a shareholder owns a slice of the company itself.

So if the company earns money and the board decides to share it, you receive your prorated amount. Own 10% of the company and you get 10% of the dividend. Own 0.001% and you get exactly that. The rights attach to the share, not to the person — the same principle that runs through the whole of common stock on the SIE.

The three kinds of dividends

The exam wants you to know three types of dividend.

Cash dividends

The one everyone knows — literally cash, usually paid quarterly in roughly equal amounts. If a company earns $5 a share for the year and pays out $4, you receive that cash.

Stock dividends

Here the company gives you more shares instead of cash. Growth companies like stock dividends because they part with no cash, and you end up with the same total value: more shares at a lower price.

To work one out, decimalise the percentage and add one. A 25% stock dividend gives a factor of 1.25. Multiply your shares by it — more shares — and divide the price by it — lower price. Say you hold 100 shares at $100 and receive a 25% stock dividend: you finish with 125 shares at $80. Same $10,000 either way. A stock dividend simply changes your share count and your per-share cost basis, not your total value, and is generally not taxed when you receive it.

Product dividends

Rare now, but tested. Nike might send Air Jordans to shareholders, or Amazon might send Kindles. The point the exam cares about: product dividends are taxable.

Why the price drops on the ex-dividend date

Here is a detail people miss. When cash leaves the company to go to shareholders, the stock price is reduced by the amount of the dividend. A $50 stock that pays a $0.25 dividend opens the next morning — the ex-dividend date — at $49.75.

Any resting orders sitting below the market are reduced by the same amount, because those are the orders below the current price: buy limits and sell stops. The one exception is an order marked DNR — Do Not Reduce. A handy memory hook from the video: DNR here means “do not reduce,” not “do not resuscitate.” DNR orders stay exactly where they are.

The board of directors

Shareholders do not run the company day to day. You elect a board of directors, much like a republic elects its representatives. The board hires and fires the executive team, signs off on the big decisions, and — importantly — decides whether a dividend is paid. Shareholders never vote themselves a dividend. That would be the inmates running the asylum.

Voting: statutory versus cumulative

This is a classic SIE question. Picture three board seats open and ten people running for them.

• Statutory voting — one share, one vote per seat. Own 100 shares and you may cast up to 100 votes for each of the three seats, but you cannot pile them onto one candidate.
• Cumulative voting — you may combine your votes. 100 shares across 3 seats gives you 300 votes, and you can throw all 300 behind a single candidate.

Transfer agents and proxies

The transfer agent is hired by the issuer to keep the records straight: who owns the stock, making sure dividends are paid, sending proxies out to shareholders, and making sure bondholders receive their interest.

A proxy is voting material — the right to vote on your behalf. You are allowed to hand your proxy to another person. Because most stock is held in street name (in the name of your broker-dealer), most shareholders give their proxy to the firm that holds their shares. One wrinkle worth knowing: even if you gave your proxy to, say, Schwab, if you show up at the meeting in person you can still cast your own vote.

Your right to the records

Ownership comes with a right to transparency, and it runs through two filings:

• The 10-Q is the quarterly report every public company sends to the SEC.
• The 10-K is the big one: the audited annual report — income statement, balance sheet, the lot. It has to be correct.

A more sophisticated investor can also request the SAI (Statement of Additional Information), a far more detailed record of how and what the company invests in. If you ask for it, the company has to provide it.

Authorised, issued and outstanding shares

Companies divide their shares into buckets, and the exam tests the vocabulary.

• Authorised shares — the maximum the company may ever create, set in the corporate charter.
• Issued shares — the authorised shares that have actually been sold to the public. The ones held back are unissued. A company might authorise 10 million, issue 6 million, and keep 4 million unissued to raise money later.
• Treasury shares — shares the company has bought back in the open market. Buybacks have been controversial for 20 years, but the mechanics are simple: buying back shares reduces the shares outstanding, which raises earnings per share, which supports the price.
• Outstanding shares — issued minus treasury. These are the shares in the public’s hands. Outstanding shares × market price gives the company’s market value.

Dilution and preemptive rights

Dilution is exactly what it sounds like — add water and the drink gets weaker. Anyone who saw The Social Network watched it happen: Mark Zuckerberg’s co-founder thought he owned about 30% of the company and was diluted down to almost nothing.

The mechanics are simple. Own 50,000 shares out of 500,000 outstanding and you own 10%. The company issues another 500,000 shares to raise money; you still hold 50,000 — so now you own 5%. You did nothing and lost half your stake.

The protection is a preemptive right. It gives existing shareholders the right to buy enough new shares to restore their original ownership percentage. Two features the exam wants:

• One right per share you own. Rights are short-term (offered for roughly 60 to 90 days) and they trade separately in the market.
• They let you buy at a discount to the market price. If the stock trades at $50 and your right lets you buy at $40, that right is worth money the moment you receive it.

You can do one of three things with a right: exercise it, sell it, or let it expire. Letting it expire is treated as a fiduciary malpractice, because you are throwing away something with real value — if you do not want the shares, sell the right. One more quirk on the maths: when the conversion leaves you with a fraction of a share, you round up — and it rounds up from any fraction, not the fifth-grade “0.5 and above” rule. 3.2 shares becomes 4.

What to focus on

Know these cold: the three dividend types (and that product dividends are taxable), the ex-dividend price adjustment and DNR, statutory versus cumulative voting and who each one favours, the authorised / issued / outstanding / treasury vocabulary, and that preemptive rights are short-term, priced below the market, and should never be left to expire. The heavy rights-valuation calculation is low priority — if one appears, flag it and come back at the end.

And none of this sticks without a schedule you can actually finish. Here is the study plan I give every candidate, including how many hours the SIE really takes.

Frequently asked questions

What is the difference between statutory and cumulative voting?

Statutory voting gives one vote per share for each open seat and favours large, institutional shareholders. Cumulative voting lets you combine all your votes onto a single candidate and favours small, retail shareholders.

Why does a stock price fall on the ex-dividend date?

Because the cash paid out leaves the company. The price drops by the dividend amount, and resting orders below the market — buy limits and sell stops — are reduced by the same amount, unless the order is marked Do Not Reduce (DNR).

Are stock dividends and product dividends taxable?

Product dividends are taxable — that is the exam’s point. A stock dividend, by contrast, just changes your share count and per-share cost basis, not your total value, and is generally not taxed when received.

What are outstanding shares?

Issued shares minus treasury shares — the shares held by the public. Outstanding shares multiplied by the market price gives the company’s market value.

Part 2 picks up the rest: your right to inspect the books, the liquidation order and the right to transfer ownership.

The short version

Common stock is ownership, and ownership brings votes and a conditional claim on dividends. Learn the three dividend types, the ex-dividend adjustment, statutory versus cumulative voting, the share buckets, and why preemptive rights are worth money the day they arrive. Part 2 picks up the remaining rights — inspection, liquidation and transfer.

If you would like to work through this with someone who traded it for a living, get in touch or have a look at the tutoring options.