Common and Preferred Shares: The Basics
Common and preferred shares, or equities, are one of the primary asset classes when investors look to create a portfolio strategy.
Equities are part ownership, through shares, of a business, and investors purchase these investments in the hopes that they will provide income or increase in value. Investors may purchase shares in a number of ways, including directly from the company, over a stock exchange, or as part of an investment fund.
Publicly-traded company shares are available on stock exchanges such as the Toronto Stock Exchange or TSX Venture Exchange. Private company investments take place in the exempt or private placement market. This market is explained in more detail in our Private Placement Investor Guide.
It’s important to do your research before purchasing an investment product. There are a number of places to research common or preferred shares, even if the company is not public.
What are Common Shares?
When investors or the media talk about buying and selling stocks, they are usually referring to common shares.
Common shares give the holder voting rights in most cases. Shareholders look to earn capital gains or regular income from this form of investment.
What are Preferred Shares?
Preferred shares are similar to common shares, but also have terms that resemble fixed-income investments. Preferred shareholders are entitled to regular payments in the form of dividends, but often do not have voting rights.
These shares get priority on assets over common shareholders if the company goes bankrupt.
Investors should carefully read all preferred share documentation before deciding to invest because issuers can create terms unique to their financial position or industry.
Risk and Liquidity
When investing in common or preferred shares, investors may find their holdings are difficult to sell or too volatile for their investment goals. Therefore, equity investments require careful risk and liquidity considerations.
In general, risk depends on the size, profitability, financial stability, management skills, and general economic conditions of the company. For example, new venture firms are more risky than large multinational corporations with a long history of profits and a stable management structure.
Liquidity is simply a measure of how easy or difficult it is to sell your investments. Common shares of major companies on a stock exchange usually have a large number of buyers and sellers, which generally increases the liquidity. Investors may not be able to sell shares if a company trades infrequently or shows signs of trouble.
After assessing the risk and liquidity of a potential investment, consider how it fits into your financial plan and investment goals. Diversification and asset allocation can help investors weather ups and downs in the markets.
Fees and Costs of Equity Investments
Investors who buy or sell common and preferred shares may incur brokerage or trading fees. These fees can raise the costs of investing and lower potential returns. Some firms may also charge investors a fee to set up a trading account.
Capital gains taxes and other income taxes may apply depending on your personal financial situation.
Finally, while not necessarily a hard cost, there can be significant opportunity costs when buying or selling equities. This cost includes whether or not your holdings will keep up with benchmarks and other market indices over time.
The Investment Fee Guide on InvestRight is a good primer to understanding how investment fees affect returns over time.
More Information on Equity Investments
To learn more about equity investments, including common and preferred shares, visit these BCSC InvestRight resources:
- Types of Investments: Shares
- Fees & Charges
- Know Your Investments
- Private Placement Market
- InvestRight Glossary
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
InvestRight.org is the British Columbia Securities Commission’s investor education website.