Canadian Securities Course (CSC) Level 1 Practice Exam

What are the advantages and disadvantages of Common shares?

1. No capital repayment, high dividend expenses

2. Fixed dividends, diluted equity

3. No market volatility, limited voting rights

4. Easy valuation, regular dividend payments

The correct answer is: No capital repayment, high dividend expenses

The correct option highlights some key characteristics of common shares. Common shares do not guarantee capital repayment, meaning that in the case of a company winding up, shareholders may not recover their initial investment. This inherently translates to a higher risk for investors. Additionally, common shares typically involve higher dividend expenses when dividends are paid, as they are based on the company's discretion and performance, potentially leading to significant payouts during profitable times. Understanding the context of common shares provides clarity on their risk-return profile. They are subject to market volatility, which can lead to significant fluctuations in price. While high dividend expenses can be an indication of a successful company that distributes profit to its shareholders, it is important to note that such dividends are not fixed and can be suspended if a company faces financial challenges. Focusing on the other options can help reveal the distinctions between common shares and other types of securities. For instance, fixed dividends relate more to preferred shares, which offer more stability in payment but typically do not provide voting rights. Limited voting rights do exist for some types of shares, but common shares generally come with robust voting rights, unlike what is suggested in one of the other alternatives. Easy valuation and regular dividends would also not typically apply to common shares given that their value can be more