1. COMMON SHARES
• Potential for capital appreciation
• The right to receive any common share dividends paid by the company
• Voting privileges, including the right to elect directors, approve financial statements and auditor’s reports, and vote on important issues
• Favourable tax treatment in Canada of dividend income and capital gains
• Marketability—the shareholdings of most public companies can easily be increased, decreased, or sold
• The right to receive copies of the annual and quarterly reports, as well as other mandatory information pertaining to the company’s affairs
• The right to examine certain company documents, including its by-laws and its register of shareholders, at specified times
• The right to question management at shareholders’ meetings
• Limited liability
• The issuer has no obligation to pay dividends.
• Common shareholders generally have very little influence over the day-to-day operations of the company.
• Common share prices can be volatile, and price changes can lead to investors losing money.
• In terms of claims to assets, common shareholders fall behind creditors, bondholders, and preferred shareholders in the case of bankruptcy or dissolution.
REGULAR AND EXTRA DIVIDENDS
EX-DIVIDEND AND CUM DIVIDEND
Without dividend or with dividend
DIVIDEND REINVESTMENT PLANS
Dollar cost averaging
• Non-voting shares carry no right to vote, except in certain limited circumstances.
• Subordinate voting shares carry a right to vote, if another class of shares is outstanding and those shares carry a greater voting right on a per share basis.
• Restricted voting shares carry a right to vote, subject to a limit or restriction on the number or percentage of shares that may be voted by a person, company, or group.
STOCK EXCHANGE REGULATIONS OF RESTRICTED SHARES
• Restricted shares must be identified by the appropriate restricted share term.
• Disclosure documents—including information circulars, annual reports, and financial statements sent to voting shareholders—must also be sent to holders of restricted shares, and the documents must describe the restrictions on their voting rights.
• Restricted shares must be identified in the financial press with a code.
• Dealer and advisor literature must properly describe restricted shares.
• Trade confirmations must identify restricted shares.
• Holders of restricted shares must be given notice of shareholders’ meetings. They must also be invited to attend and be permitted to speak at the meetings.
• Minority approval is required for any corporate action that would result in the creation of new restricted shares.
STOCK SPLITS AND CONSOLIDATIONS
Stock split or reverse stock split (or consolidation)
2. PREFERRED SHARES
THE PREFERRED SHAREHOLDER’S CLAIM TO ASSETS
PREFERRED ISSUE VERSUS DEBT ISSUE
• It is not feasible for the company to market a new debt issue because existing assets are already heavily mortgaged.
• Market conditions are temporarily unreceptive to new debt issues.
• The company has enough short- and long-term debt outstanding (i.e., its debt-to-equity ratio is high). Preferreds would increase the equity component
• The directors are reluctant to assume the legal obligations to pay interest and principal.
• The directors decide that paying preferred dividends will not be onerously expensive.
PREFERRED SHARE FEATURES
• Cumulative feature – Non-cumulative feature
• Callable feature – Non-callable feature
• Voting privileges
• Purchase fund
• Sinking fund
STRAIGHT PREFERRED SHARES
• They provide greater safety than common shares through preference to dividend and asset entitlements
• For individuals, they provide a tax advantage through the dividend tax credit.
• For corporations, they provide a tax advantage through preferred dividends received from taxable Canadian companies on a tax-exempt basis.
• They provide less safety than a debt investment because dividends are not a legal obligation. • They do not provide voting privileges (unless a stated number of dividend payments is in arrears).
• They have no maturity date.
• They are less marketable than common shares because there are usually fewer preferreds than common outstanding.
• They have limited potential for price appreciation compared to common shares. The price at which the preferreds could be redeemed by the issuer places a limit on any appreciation that might occur as a result of a decline in interest rates.
CONVERTIBLE PREFERRED SHARES
• They provide a two-way security because the holder is in a more secure position than the common shareholder, and yet the holder can realize a capital gain if the market price of the common shares rise sufficiently.
• They usually provide a higher yield than the underlying common shares.
• They provide the right to obtain common shares through conversion without paying a commission.
• They usually provide a lower yield than a comparable straight preferred.
• They sometimes convert into less (or more) than a standard trading unit of common shares, which in turn may be more difficult to sell than a standard trading unit.
• They revert to straight preferreds when the conversion period expires, if conversion has not taken place.
RETRACTABLE PREFERRED SHARES
• They provide a predetermined date and price at which to tender shares for retraction. The shorter the time interval to the retraction date, the less vulnerable the stock’s market price is to increases in interest rates. A straight preferred declines in price as interest rates rise, whereas a retractable preferred will not fall significantly below its retraction price as the retraction date approaches.
• They provide a capital gain if purchased at a discount from the retraction price and subsequently tendered at the retraction price.
• They sell above the retraction price and at least as high as the call price when interest rates decline sufficiently.
• They do not retract automatically; the retraction privilege expires if no action is taken by the holder during the election period.
• They become straight preferred shares if they are not retracted when the election period expires. If this occurs in a period of high or rising interest rates, the stock’s market value declines. The shares sell on a straight yield basis after the retraction privilege expires.
FLOATING-RATE PREFERRED SHARES
• They are issued during periods in the market when a straight preferred is hard to sell and the issuer does not want to make the issue convertible or retractable. (Making the issue convertible could potentially dilute shareholder equity, whereas making it retractable allows holders to potentially force redemption at an inopportune time.)
• They are also issued when the issuer believes that interest rates will not go much higher than the rate on the new issue date. (The company is prepared to pay a higher dividend if interest rates rise, but if interest rates decline, of course, the issuer will pay a smaller dividend—subject, in most cases, to a guaranteed minimum rate.)
• They provide higher income if interest rates rise, but lower income if interest rates fall.
• They provide a variable amount of annual income that is difficult to predict accurately, but which reflect prevailing interest rate levels.
• As an investment, their market price is less sensitive to changes in interest rates compared to the market prices of straight preferred shares. The dividend payout of variable-rate preferreds is tied to changes in interest rates on a predetermined basis.
FOREIGN-PAY PREFERRED SHARES
3. STOCK INDEXES AND AVERAGES
• Gauge the overall performance and directional moves in the stock market.
• Enable portfolio managers and other investors to measure their portfolio’s performance against a commonly used yardstick within the stock market.
• Create index mutual funds.
• Serve as underlying interests for options, futures, and exchange-traded funds.
• S&P/TSX Composite Index
• S&P/TSX 60 Index
• S&P/TSX Venture Composite Index
• DJIA – THE DOW JONES INDUSTRIAL AVERAGE
• THE S&P 500