When you read or hear about stocks mentioned in the media or over the water cooler, people are generally talking about common shares, which give investors an ownership interest in a company. Investors can buy common shares on stock exchanges, or through private placements. Investors can also purchase a company’s dividend and receive priority over common shares, preferred shares, and in Canada, flow-through shares.
Before purchasing shares that trade on a stock exchange, you will typically need to open a trading account with a registered investment firm. To find out more about the types of accounts available to you, visit our Investment Accounts section.
Types of Shares
This type of share represents an ownership interest in a company. As an owner, you share in the company’s success and failure. Unless specifically stated, common shares give you the right to vote for the directors who will be elected to sit on the company’s board of directors and to vote on other significant corporate decisions. Shares described as non-voting or restricted voting shares do not have these rights.
This is a type of common share issued only in Canada by oil and gas or mineral exploration companies. These shares allow you to claim federal, and sometimes provincial, tax deductions or credits. The company will likely charge you a higher price for a flow-through share than for its common shares. This reflects the tax benefit you’ll receive.
This is a type of investment with features that make it partly like debt (fixed income investments) and partly like equity investments (potential appreciation). Preferred shares entitle you to receive dividends before the company can pay dividends to investors who hold common shares, but they do not entitle you to elect directors or vote on other corporate decisions. Preferred shares also provide priority over common shareholders to the company’s assets in the event that the company goes into bankruptcy.
There are many different terms attached to preferred shares. Make sure you understand the various special benefits and the restrictions for any preferred shares you buy.
What Risks do They Have?
These are medium- to very high-risk 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. Share price fluctuation is a risk – you’ll lose money if you sell at that lower value. Furthermore, if the company fails, you’ll almost certainly lose your investment, and receive no returns.
Some shares that do not trade on a stock market may trade on the OTC Bulletin Board or similar market. They come with additional risks, such as lack of exchange oversight.
There is additional risk that the company may not meet the strict government requirements to offer flow-through expenses to you. If that happens, you may not be able to claim the tax deductions that you expected or the CRA may reassess your return. In that case, you may have to pay back taxes, potentially many years after you made the investment.
When you sell flow-through shares, the CRA will require you to pay tax on the total sale price. This is because you were able to claim the full amount of your purchase price as a tax deduction.
Preferred shares are slightly less risky than common shares. The price of a preferred share won’t fluctuate as much as a common share. However, if the company starts to fail, you won’t be in a position to influence the company because you don’t have voting rights.
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, during stock market hours and at a published price. Some listed companies trade infrequently so you may need to wait or reduce your price to sell. If the shares trade on an over-the-counter market, it may be harder to find a buyer for the shares you are trying to sell.
Shares purchased in a private placement are subject to a hold period during which you generally cannot sell. If you take advantage of the tax deductions and/or tax credit on flow-through shares, you will also be subject to a holding period of at least 18 to 24 months.
What are the Associated Costs?
The only cost of investing in 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 and preferred shares: dividends and/or selling them in the market for a profit. Flow-through shares can make money on price appreciation and tax deductions.
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. Earning dividends over time can increase your profits.
Another way to make money on common shares is to sell them for a profit. This approach can be risky and usually requires greater knowledge, experience, and more time than the average investor has. A registered investment advisor can help you buy and sell your shares, and should work with you on strategies that fit your needs and risk tolerance.
You’ll earn capital gains if you sell your shares for more than what you paid for them, or capital losses if you have to sell your shares when the price has declined.