What are the main types of equity securities?

The correct response identifies the primary types of equity securities, which are common stock and preferred stock. Common stock represents ownership in a company and typically grants shareholders voting rights, allowing them to participate in corporate decisions, as well as a claim on a portion of the company’s profits in the form of dividends. Preferred stock, on the other hand, usually does not come with voting rights but offers a higher claim on assets and earnings, meaning preferred shareholders receive dividends before common shareholders and have a priority claim in case of liquidation.

Because of these characteristics, common stock and preferred stock are both classified as equity securities, representing ownership in a company. They are directly tied to a company’s equity and are essential for understanding a firm's capitalization structure.

The other options contain securities that do not fit the definition of equity. Derivatives are financial instruments whose value is derived from other underlying assets, rather than representing ownership in a company. Bonds are fixed-income securities representing a loan made by an investor to a borrower, and they do not confer any ownership rights. Debt securities, like bonds, involve repayment obligations rather than ownership stakes in a company. Therefore, options containing these other types of securities do not accurately reflect the main types of equity securities.