Association for Financial Professionals (AFP) Practice Exam

What type of stock allows investors to buy into a specific fast-growing business segment without acquiring the entire company?

1. Convertible stock

2. Adjustable rate preferred stock (ARPS)

3. Tracking stock

4. New debt

The correct answer is: Tracking stock

Tracking stock is designed to give investors the opportunity to invest in a specific segment of a company's business without having to purchase shares of the entire company. This type of stock is issued by a parent company but is tied to the performance of a particular division or subsidiary, allowing investors to benefit from the growth and profitability of that segment. Investors who choose tracking stock can effectively focus on the results generated by a business unit that may be growing at a faster rate compared to the overall company. This allows for targeted investment in fast-growing segments, which can be particularly appealing to those wishing to capitalize on specific market opportunities while benefiting from the parent company's overall stability. Other types of stock mentioned, such as convertible stock and adjustable rate preferred stock, serve different investment purposes. Convertible stock provides the option to convert into common shares, while adjustable rate preferred stock typically offers fixed dividends that change periodically based on a benchmark interest rate. New debt relates to borrowing and interest obligations, rather than equity investment. Thus, tracking stock is the option that directly aligns with the question's focus on targeted investment in fast-growing business segments.