Common shares
What is a common share?
A common share is a residual ownership interest in a company. As an owner, you share in the company’s success and failure. Most common shares give you the right to elect directors and vote on other corporate decisions. Shares described as non-voting or restricted voting shares do not.
What risks do they have?
Common shares are medium- to very high-risk investments and definitely higher risk than fixed income investments. Risk depends on many things, including the size, profitability, and financial stability of the company, the skills of its management, and general economic conditions. Make sure you understand the company’s business and know about the background of its management team.
The most significant risk is that the company might fail. If the company fails, you’ll almost certainly lose your investment, and receive no returns.
Another risk of common shares is price fluctuation. If the price has dropped, you’ll lose money if you sell at that lower value.
Even if a company is currently paying dividends, there’s no guarantee that it will continue to do so. It may even stop paying dividends on its common shares altogether.
Some common shares that do not trade on a stock market may trade on the OTC Bulletin Board
or pink sheets or similar market. They come with additional risks, such as the difficulty in finding out the appropriate price for the share, and finding a buyer for shares that you are trying to sell. See About the market for more information on how the markets work.
If you’re considering investing in the common shares of a private company, there are many more risks to consider.
Can you sell them easily?
It depends. The common shares of major companies on a stock exchange generally have a large number of buyers and sellers and you may sell your shares at any time at a published price. Some listed companies trade infrequently so you may need to wait or reduce your price to sell. Shares purchased in a private placement are subject to a hold period during which you generally cannot sell.
If the shares trade on an over-the-counter market, it is harder for you to follow the share price, and it may be harder to find a buyer. It will be harder to sell your shares if they do not trade on any market at all.
What are the associated costs?
The only cost of investing in common shares is paying a purchase or sale commission or paying a fee to your advisor to manage your account. There should be no ongoing costs.
What are the expected types of returns?
There are two ways to make money on common shares: dividends and/or an increase in price.
Larger, established companies typically pay their investors regular dividends, but many smaller Canadian companies do not. They may not be making enough profit, or they may want to reinvest their profit in the company itself. Dividends can be paid in the form of cash or additional stock in the company. If a company has preferred shares, it must pay profits to these shareholders first before it can pay a common share dividend.
Another way to make money on common shares is to sell them for a profit. There are two approaches: buy and sell quickly to take advantage of share price movement, or buy and hold. The first approach can lead to significant profits but is also risky and requires greater knowledge, experience, and time than the average investor has. The second approach requires time and patience. You may have to hold the common shares for many years to sell them for a profit. This approach makes most sense if the company is paying you dividends in the meantime.
Either way, you’ll get capital gains if you sell your shares for more than you paid for them, or capital losses if you have to sell your shares when the price has declined.