Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

Preferred shares are considered an example of an equity security because they represent ownership in a corporation, much like common shares. While preferred shares typically do not have voting rights, they provide holders with a fixed dividend that is paid before dividends are distributed to common shareholders. This fixed dividend feature offers a more stable income but, unlike debt securities (such as debentures, mortgage bonds, or equipment trust certificates), preferred shares do not represent a loan to the corporation; instead, they signify a claim on the corporation's assets after debt obligations have been satisfied in the event of liquidation.

In contrast, debentures, mortgage bonds, and equipment trust certificates are all types of debt securities. They involve lending money to the issuer in exchange for interest payments and the return of principal at maturity, which is fundamentally different from the ownership structure represented by preferred shares. Understanding this distinction is crucial for recognizing the different roles and risks associated with equity and debt securities in investment portfolios.