An ownership interest in a company — a residual claim on assets after all liabilities and senior claims are paid.
The exam rarely asks “what is equity” directly; it tests the claim hierarchy and risk-return ranking that flows from the residual nature of the claim. The classic item gives you a liquidation waterfall and asks who is paid where — the full order runs secured creditors, then unsecured/subordinated debt, then preferred, then common, so common bears the most risk and carries the highest required return. A frequent trap pairs this with the cost-of-capital LOS: because common equity is riskiest (and, unlike interest, dividends are not tax-deductible), it is the most expensive source of financing, not the cheapest.
The sharp distinction students miss is that preferred stock is legally equity but economically bond-like — interest-rate-sensitive and senior to common — so don’t lump it with common when ranking risk. Reinforce the residual logic with one mechanism: a dividend is discretionary, declared by the board and never owed the way coupon interest is, which is precisely why equity holders demand the equity risk premium. Memory hook: equity is the residual claimant — riskiest in, but no ceiling on the reward.
A distribution of company earnings to shareholders, paid in cash, additional shares, or property.
The exam loves the four-date timeline: declaration, ex-dividend, record, and payment. The high-yield tell is that whoever owns the share before the ex-date receives the dividend; buy on the ex-date or later and the seller keeps it. Under the current T+1 settlement standard (U.S. since May 2024), the ex-date now coincides with the record date — so older question banks placing the ex-date one business day before record reflect the retired T+2 convention. Expect a question asking which date the price drop occurs on (the ex-date) versus which determines eligibility (record).
Don’t confuse a stock dividend with a cash dividend: a stock dividend (or split) changes nothing about total wealth, equity, or market cap—it merely lowers price proportionally, so EPS falls but P/E is unchanged. The classic trap is treating dividends and a repurchase as different in value; pre-tax, all-else-equal payouts of equal size leave a shareholder equally well off (the dividend-displacement idea). And never equate a high yield with a generous payout—yield rises when price falls.
Equity with a fixed dividend and seniority over common stock in dividends and liquidation — but typically no voting rights.
Cumulative preferred shares accrue any dividends in arrears, which must be cleared in full before any common dividend resumes; non-cumulative shares simply forfeit the missed payment. The exam loves to make you value perpetual fixed-rate preferred as a perpetuity: V = D ÷ r, then ask how the price reacts when the required yield rises — it falls. Watch the feature labels: participating preferred shares in profits above the stated dividend, callable lets the issuer redeem (a cap on investor upside), and putable lets the holder sell back (a price floor) — students routinely flip callable and putable.
The classic trap is treating preferred like common equity: preferred dividends are declared at the board’s discretion, so skipping them does not trigger default the way an unpaid bond coupon would — yet they rank ahead of common in both dividends and liquidation. Distinguish it from a plain dividend too: a common dividend can be raised indefinitely, whereas straight preferred’s payout is fixed and capped (the participating variety being the exception). Hook: preferred is the “senior, silent” cousin — paid first, but no vote and little growth.
A company buying back its own outstanding shares, reducing share count and returning cash to remaining shareholders.
The exam’s favorite item gives you cash, shares outstanding, and a per-share repurchase price, then asks the effect on EPS or book value per share (BVPS). The decisive EPS rule compares the after-tax cost of the funds — the after-tax cost of debt if borrowed, or the after-tax interest the idle cash was earning — against the stock’s earnings yield (E/P), the inverse of its P/E: cost of funds below the earnings yield raises EPS; above it dilutes. For BVPS the trap reverses on a different benchmark — repurchasing above book value per share lowers BVPS, buying below book raises it.
Watch the wealth question: a buyback and an equal-sized cash dividend leave a shareholder equally well off, ignoring taxes and signaling. The classic confusion is with dividend — it forces taxable cash on every holder now, whereas a repurchase lets sellers choose and defers capital gains, yet neither changes enterprise value or pre-tax equity wealth. Don’t assume buybacks always lift EPS; that holds only when funds cost less than the earnings yield.
A measure of a stock's systematic risk — the sensitivity of its returns to broad market returns.
The exam’s favorite computation is beta as Cov(asset, market) ÷ Var(market), which equals the correlation times the ratio of standard deviations (ρ × σ_asset ÷ σ_market) — recognizing these are the same number is the tested skill. A frequent twist: a stock with higher total volatility than another can have a lower beta if its correlation with the market is low, because only the systematic portion drives beta. Expect plug-in CAPM problems where you compute required return, then judge over- or undervaluation — forecast return above the required return means undervalued (it plots above the SML).
The classic trap is conflating beta with volatility: volatility (standard deviation) is total standalone risk, whereas beta is a relative measure that strips out diversifiable risk. Don’t confuse beta with liquidity either — a high-beta stock can be perfectly liquid; liquidity is a bid-ask/depth dimension, not market sensitivity. Memory hook: beta is “how much you bounce when the market bounces” — a leveraged tracking of the index, not your jitteriness on your own.
How easily and quickly a security can be converted to cash without significant price impact.
On the exam, the classic item gives two otherwise-identical securities and asks which has the lower required return — it hinges on the liquidity premium: the less-liquid one demands higher expected return, so its price is lower, all else equal. The other staple is “rank by liquidity” or “which transaction cost is largest.” Beyond the quoted spread, large orders in thinly traded names also pay market impact (the price moves against you as you fill), so they cost more in both dimensions. Watch the direction trap: more liquid means a smaller premium, not a larger one.
Don’t confuse liquidity with its drivers or its cousins. Float is a cause — more freely tradable shares feed liquidity — not the measure itself. Volatility is the dispersion of returns, not tradability: a stock can be highly liquid yet volatile (a heavily traded large-cap around earnings). Memory hook: float and volume are inputs; spread is the readout. Liquidity also tends to evaporate exactly when markets fall, which is why illiquidity risk earns a premium.
A statistical measure of return dispersion, typically the standard deviation of returns over a period.
The exam’s favorite tell is a question that hands you total risk and asks which security a diversified investor should fear less. The answer hinges on one rule: in a well-diversified portfolio, idiosyncratic risk washes out, so only systematic risk (beta) is priced — a high-volatility stock with low beta (think gold miners) can still command a low CAPM required return, because its swings are largely market-unrelated. Watch the trap of pairing standard deviation with the Sharpe ratio (correct — total risk) but beta with the CAPM/SML (correct there); mixing them is the classic error. Since variance grows linearly with time, scaling uses the square root of time — doubling the horizon multiplies volatility by √2, not 2.
Don’t confuse volatility with beta (market sensitivity only) or liquidity (ease of converting to cash without moving the price). A subtle wrinkle: rarely-traded, infrequently-repriced securities can look artificially calm because stale prices smooth out true dispersion — though actively traded micro-caps usually show higher measured volatility. Memory hook: “vol = the whole bag of risk; beta = only the market’s slice.”
Annual income from a security expressed as a percentage of its price — for equities, the dividend yield.
The exam’s favorite trap is trailing vs. leading (forward) dividend yield: trailing uses the most recent year’s (trailing-twelve-month) dividends, leading uses next year’s forecasted dividends, each over the current price. A vignette that hands you both “expected” dividends and last year’s dividend is testing whether you pick the forward number for a leading yield. Watch the price too — yield always uses the current market price, not the price when the dividend was declared, so a stale price quietly distorts the answer.
Do not confuse it with earnings yield (E/P), the reciprocal of P/E and the equity leg of the Fed model; dividend yield counts only cash actually paid out, so a low payout ratio makes the two diverge sharply (most earnings retained). And keep yield distinct from total return — yield is just the income leg; price appreciation is the other, and ignoring it understates return for low-yield growth names. Hook: yield is the slice paid out; total return is the whole pie.
The number of shares actually available for public trading, excluding closely held positions.
On the exam, float most often shows up in index-construction items: you’re handed a company’s total shares and a closely held block and asked for its float-adjusted index weight. The tell is “freely tradable” or “shares available to the public.” The answer is the company’s float-adjusted market cap divided by the index’s aggregate float-adjusted market cap — so a firm with a big insider stake is underweighted versus its full market-cap weight. Pick the choice built on available shares, not total shares outstanding.
The classic trap is conflating float with liquidity: float is a share count, while liquidity is the ease and cost of trading, gauged by the bid-ask spread and daily volume. A large float makes liquidity likely but never guarantees it. Don’t confuse low float with volatility either — low float amplifies price moves, but volatility itself is the standard deviation of returns, not a share count. And a ticker is just an identifier, unrelated to float. Memory hook: float is what floats freely to the public; treasury and locked-up insider shares don’t count.
A short symbolic code that uniquely identifies a security on an exchange.
Level I rarely asks “what is a ticker” outright; it tests whether you grasp that a ticker is a trading convenience, not a permanent unique identifier. A typical item gives a scenario — a cross-listed firm or a post-merger symbol reuse — and asks which code reliably pins down the security across markets and over time. The answer is the ISIN (globally unique, 12 characters) or CUSIP (the 9-character North-American code an ISIN wraps), because each is permanent while the symbol is reassignable. A classic “tell”: the same letters mapping to two different issuers in different periods (e.g., V went from Vivendi to Visa).
Don’t confuse the ticker with float or equity: float counts how many shares trade freely, equity is the ownership claim itself (a residual claim, paid after debt and preferred), and the ticker is merely the label you type to trade either — venue-level metadata, not security-level data. Memory hook: a ticker is a gate number, not a passport — it tells you where to line up today, while the ISIN is the passport that travels everywhere and never gets handed to someone else.