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This section provides a brief introduction to equities, including benefits
of investing in equities and the risks involved:
What are equities?
Equities are pieces of a company, also known as "stocks."
When you buy stocks or shares of a company, you're basically purchasing
an ownership interest in that company. A company's stockholders or
shareholders all have equity in the company, or own a fractional portion
of the whole company. They buy the stocks because they expect to profit
when the company profits. Companies issue two basic types of stock: common
and preferred shares.
What are common shares?
Both public and private corporations can issue common shares. Common
shareholders are the owners of a company and initially provide the equity
capital to start the business.
Common share ownership in a public company offers many benefits to
investors. The following are some of its main advantages:
- Capital appreciation
- Dividends
- Voting privileges
- Marketability, meaning shares can easily be bought or sold
There are also a few drawbacks to owning common shares. Although part
owner of the business, common shareholders are in a relatively weak position,
as senior creditors, bond holders and preferred shareholders all have prior
claims on the earnings and assets of a company. While interest payments are
guaranteed to bond holders, dividends are payable to shareholders at the
discretion of the directors of a company.
What are preferred shares?
Preferred stock is a class of share capital that generally entitles
shareholders to fixed dividends ahead of the company's common shares and to
a stated dollar value per share in the event of liquidation. Typically, the
preferred shareholder occupies a position between that of a company's
creditors and its common shareholders. If a company's ability to pay interest
and dividends suffers due to poor earnings, the preferred shareholder is
better protected than common shareholders but worse off than creditors.
There are many different variations of preferred shares, including
convertible, retractable, and variable-rate preferred shares. Most Canadian
preferred shares are cumulative: when dividends are withheld, they accumulate
in what is known as arrears. All arrears of cumulative preferred dividends
must be paid before any common dividends can be distributed.
As preferred shares have characteristics of both debt and equity; they
provide a link between the bond and common equity sections of a portfolio.
Because there is such a wide variety of preferred shares available, they are
suitable investments for most investment portfolios.
One shortcoming of preferred shares is that many are non-voting. However,
after a specified number of preferred dividends are withheld, voting rights
are usually assigned to preferred shareholders.
Why should I invest in equities?
No matter where you are in life, equities have an important role to play
within a properly diversified portfolio. They can help with building your
savings, maximizing your income and protecting your wealth:
- Building your savings
Historically, equities provide superior long-term returns compared to
cash and fixed-income investments. However, equities typically fluctuate
more in value.
Because these fluctuations tend to smooth out over time, it’s
important to take a long-term perspective when investing in equities. Just
because a particular equity is down one year doesn’t mean it will be
down in 10 years. The key is to determine when it’s a temporary
setback and when it’s a more serious problem.
- Maximizing your income
If you’re an income-oriented investor, your portfolio probably
contains a high percentage of T-bills and government bonds. However, it
’s important not to overlook the key role that equities can play in
your portfolio. First, certain equities like income trusts can enhance
your income. In addition, the income generated by equity investments—
like dividends or capital gains—is taxed more favourably than
interest income. Setting aside a certain percentage of your portfolio to
equities can enhance your after-tax income.
- Protecting your wealth
Another reason to invest in equities is to protect your wealth. This
may seem counterintuitive given that equities are not guaranteed, while
fixed-income investments are. However, because fixed-income investments
offer such low interest rates, they offer little protection from taxes and
inflation eroding your wealth over time. Again, adding a certain percentage
of equities to your portfolio, while keeping the balance in guaranteed
investments, can help protect your portfolio’s value in the long
run.
Are there risks involved with equities?
Yes. Equity investments vary in their risk but are generally considered
higher risk than cash-type investments or bonds.
Equities offer growth of capital and dividends but you must endure the
unpredictable ups and downs (risk) of the stock market. This is one of the
many reasons equities are often more suitable for longer investing time
horizons.
Take the next step…talk to an advisor.
Our Investment Advisors
are here to help recommend the solutions that are best for you. To learn
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