An equity security represents part ownership in a company with one or more classes of shares. Common shares and preferred shares are equity securities.
When a company ceases operations, the money from the sale of its property is first used to repay its lenders and pay its income taxes. Anything that’s left over goes to the holders of equity securities (the shareholders).
The company may also pay the shareholders a portion of its profits in the form of dividends.
Buying and/or selling shares
You can buy and/or sell shares through an on-line broker or a dealing representative of an investment dealer. When you sell shares, the sale will result in a capital gain or a capital loss.
Equity security with
- Usually, no right to vote
- Right to receive dividends calculated before the dividends of other shareholders
Some companies issue what are called preferred shares. Preferred shareholders usually have the right to receive a dividend before the common shareholders’ dividend is calculated. The dividend may be fixed or be determined using a specific formula. The dividend may, for example, be fixed at $0.3125 per quarter for the first five years, then adjusted every five years thereafter at the 5-year federal government bond rate plus 4%. There is a chance that a dividend will be paid to the preferred shareholders but not to the common shareholders.
If the company is dissolved, the preferred shareholders will share a portion of the remaining assets.
With some exceptions, preferred shareholders do not have any voting rights.
Preferred shares often have special features, such as the right of the holder to retract the shares (i.e., force the company to repurchase them) at specified times. Preferred shares may be:
- convertible (turned into common shares at a pre-determined price)
- redeemable (repurchased by the company at pre-determined maturities)
- cumulative dividends (Dividends not paid out during the year accumulate. The company therefore cannot pay out dividends to the common shareholders until the dividends for the preferred shareholders have all been paid out.)
Expected return
The dividends associated with preferred shares are calculated according to pre-defined rules, but the company may reduce or suspend dividend payments if, for example, its earnings are less than forecast or if, for various reasons, it needs to retain its earnings.
The value of preferred shares is primarily determined by interest rate movements and company earnings. It may also be affected by such things as the conversion and retraction privileges.
Liquidity
Preferred shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
The risk associated with preferred shares depends on several factors, such as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed the company is to economic downturns. If the company is dissolved and the assets are distributed, the preferred shareholders will be paid after governments and the company’s employees and creditors but before the common shareholders.
There are a number of situations that may result in a decrease in the share’s value, including:
- Suspension of dividends due to financial difficulties
- Actual or anticipated movements in interest rates
Also, an increase in the rate of return available on other investments may make the preferred shares’ fixed dividend less attractive, which will put pressure on the market to reduce the share price.
Equity security with
- Right to vote
- Right to receive dividends
- Tax advantages
Some companies in the oil, gas and mining sectors issue something called flow-through shares, which allow the company to transfer eligible exploration, development and investment expenses to the holders, who then claim tax deductions.
Expected return
The profit from these shares depends on the tax advantages available to the investor. It is also determined by movements in the share price, with the sale of the shares resulting in a capital gain or loss, depending on whether the share price has gone up or down.
Liquidity
Flow-through shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
High. Exploration and development programs are generally high-risk. Also, there is a chance that the exploration expenses will be considered ineligible for tax deductions, in which case the deductions will be denied.
A share is an equity security issued by a company. The company may distribute a portion of its earnings to shareholders by paying them a dividend. Common shareholders usually have the right to vote on certain decisions related to the business. When a company ceases operations, the proceeds from the sale of its assets are first used to satisfy the claims of its lenders and pay any income taxes it owes. The remainder is distributed to the shareholders.
Equity securities with
- Right to vote
- Right to receive dividends
Expected return
Returns on common shares can take the form of dividends or capital gains (or losses).
Many companies pay regular dividends to their shareholders. Others may not pay dividends, because the company is either not turning a profit or prefers to hold onto its earning and reinvest them. If a company issues preferred shares, the preferred shareholders will be paid a “preferred” dividend that is calculated before the dividend of the common shareholders. This means there is a chance that a dividend will be paid to the preferred shareholders but not to the common shareholders.
Returns often are primarily determined by movements in the share price, with the sale of the shares resulting in a capital gain or loss depending on whether the share price has gone up or down. The common share price may increase or decrease, sometimes quickly and significantly, depending on such factors as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed it is to economic downturns.
Liquidity
Common shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
Medium to high risk. The risk associated with common shares depends on several factors, such as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed the company is to economic downturns. If the company is dissolved and the assets are distributed, the common shareholders will be paid after governments and the company’s employees, creditors and preferred shareholders.
Equity security with
- Limited right to vote
- Right to receive dividends
Restricted shares resemble common shares. However, they have a limited right vote or no right to vote except in special circumstances.
Expected return
Returns on restricted shares can take the form of dividends or capital gains (or losses).
Many companies distribute regular dividends to their shareholders. Others may not pay dividends, because the company either is not turning a profit or prefers to hold onto their earnings and reinvest them.
Returns often are primarily determined by movements in the share price, with the sale of the shares resulting in a capital gain or loss depending on whether the share price has gone up or down. The common share price may increase or decrease, sometimes quickly and significantly, depending on such factors as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed it is to economic downturns.
Liquidity
Common shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
Medium to high. The risk associated with restricted shares depends on several factors, such as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed the company is to economic downturns. If the company is dissolved and the assets are distributed, the restricted shareholders will be paid after the governments and the company’s employees, creditors and preferred shareholders.
Equity security with
- Usually, no right to vote
- Right to receive dividends calculated before the dividends of other shareholders
Some companies issue what are called preferred shares. Preferred shareholders usually have the right to receive a dividend before the common shareholders’ dividend is calculated. The dividend may be fixed or be determined using a specific formula. The dividend may, for example, be fixed at $0.3125 per quarter for the first five years, then adjusted every five years thereafter at the 5-year federal government bond rate plus 4%. There is a chance that a dividend will be paid to the preferred shareholders but not to the common shareholders.
If the company is dissolved, the preferred shareholders will share a portion of the remaining assets.
With some exceptions, preferred shareholders do not have any voting rights.
Preferred shares often have special features, such as the right of the holder to retract the shares (i.e., force the company to repurchase them) at specified times. Preferred shares may be:
- convertible (turned into common shares at a pre-determined price)
- redeemable (repurchased by the company at pre-determined maturities)
- cumulative dividends (Dividends not paid out during the year accumulate. The company therefore cannot pay out dividends to the common shareholders until the dividends for the preferred shareholders have all been paid out.)
Expected return
The dividends associated with preferred shares are calculated according to pre-defined rules, but the company may reduce or suspend dividend payments if, for example, its earnings are less than forecast or if, for various reasons, it needs to retain its earnings.
The value of preferred shares is primarily determined by interest rate movements and company earnings. It may also be affected by such things as the conversion and retraction privileges.
Liquidity
Preferred shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
The risk associated with preferred shares depends on several factors, such as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed the company is to economic downturns. If the company is dissolved and the assets are distributed, the preferred shareholders will be paid after governments and the company’s employees and creditors but before the common shareholders.
There are a number of situations that may result in a decrease in the share’s value, including:
- Suspension of dividends due to financial difficulties
- Actual or anticipated movements in interest rates
Also, an increase in the rate of return available on other investments may make the preferred shares’ fixed dividend less attractive, which will put pressure on the market to reduce the share price.
Equity security with
- Right to vote
- Right to receive dividends
- Tax advantages
Some companies in the oil, gas and mining sectors issue something called flow-through shares, which allow the company to transfer eligible exploration, development and investment expenses to the holders, who then claim tax deductions.
Expected return
The profit from these shares depends on the tax advantages available to the investor. It is also determined by movements in the share price, with the sale of the shares resulting in a capital gain or loss, depending on whether the share price has gone up or down.
Liquidity
Flow-through shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
High. Exploration and development programs are generally high-risk. Also, there is a chance that the exploration expenses will be considered ineligible for tax deductions, in which case the deductions will be denied.
A share is an equity security issued by a company. The company may distribute a portion of its earnings to shareholders by paying them a dividend. Common shareholders usually have the right to vote on certain decisions related to the business. When a company ceases operations, the proceeds from the sale of its assets are first used to satisfy the claims of its lenders and pay any income taxes it owes. The remainder is distributed to the shareholders.
Equity securities with
- Right to vote
- Right to receive dividends
Expected return
Returns on common shares can take the form of dividends or capital gains (or losses).
Many companies pay regular dividends to their shareholders. Others may not pay dividends, because the company is either not turning a profit or prefers to hold onto its earning and reinvest them. If a company issues preferred shares, the preferred shareholders will be paid a “preferred” dividend that is calculated before the dividend of the common shareholders. This means there is a chance that a dividend will be paid to the preferred shareholders but not to the common shareholders.
Returns often are primarily determined by movements in the share price, with the sale of the shares resulting in a capital gain or loss depending on whether the share price has gone up or down. The common share price may increase or decrease, sometimes quickly and significantly, depending on such factors as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed it is to economic downturns.
Liquidity
Common shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
Medium to high risk. The risk associated with common shares depends on several factors, such as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed the company is to economic downturns. If the company is dissolved and the assets are distributed, the common shareholders will be paid after governments and the company’s employees, creditors and preferred shareholders.
Equity security with
- Limited right to vote
- Right to receive dividends
Restricted shares resemble common shares. However, they have a limited right vote or no right to vote except in special circumstances.
Expected return
Returns on restricted shares can take the form of dividends or capital gains (or losses).
Many companies distribute regular dividends to their shareholders. Others may not pay dividends, because the company either is not turning a profit or prefers to hold onto their earnings and reinvest them.
Returns often are primarily determined by movements in the share price, with the sale of the shares resulting in a capital gain or loss depending on whether the share price has gone up or down. The common share price may increase or decrease, sometimes quickly and significantly, depending on such factors as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed it is to economic downturns.
Liquidity
Common shares are usually traded on stock exchanges or over-the-counter (OTC) marketsAn over-the-counter market is a market where securities (such as bonds, money market securities, shares) that are not registered on an exchange are traded. It is an interdealer market.. However, some shares not listed on a stock exchange do not have a resale market. Others are subject to resale restrictions.
Risk
Medium to high. The risk associated with restricted shares depends on several factors, such as how large, profitable and financially sound the company is, how competent its executive officers are, and how exposed the company is to economic downturns. If the company is dissolved and the assets are distributed, the restricted shareholders will be paid after the governments and the company’s employees, creditors and preferred shareholders.