Common shares represent an ownership share in a company and come with one or more rights to vote. To obtain financing, companies borrow from financial institutions or issue outstanding shares. Following an initial public offering, the shares of publicly-traded companies begin to be traded on the stock markets. The shares provide the holder with the right to participate in the added value and to receive dividends when the board of directors deems it wise to distribute them. Common shares rank behind preferred shares, guaranteed debt securities and creditors.
Shares, like all other securities negotiated on the stock market, change hands between investors without any intervention by the company. A fundamental analysis of the company and a technical analysis of the security price are used to anticipate the behaviour of a stock on the stock market. Share prices therefore fluctuate or vary depending on the offers and requests from the investors as a whole (bid and ask).
Generally, shares from this type of company are stable and pay dividends. Capitalization of these companies exceeds $500 million. Usually, investors who have these shares are looking for long-term growth and a regular income.
Small-cap shares are stocks from small companies that are more susceptible to financial difficulties and they carry a higher risk. However, they offer a greater potential for profit in their sector of activity.
Generally, shares from small- and mid-cap companies are company securities for which the value of stocks held by investors is less than $500 million ($100 million for small-cap companies). These shares generally do not pay out dividends since all the profits are reinvested in the company. This is why the performance of these shares comes solely from an increase in their price.
Preferred shares are company securities that generally give the holder a right to receive a fixed dividend. Normally, preferred shares do not come with a right to vote. However, holders of these securities have priority (except in a few rare exceptions) over holders of common shares in terms of payment of dividends. It is important to note that dividend income from Canadian corporations is not taxed as heavily as interest income.
The face value of a preferred share is usually $25 and tends to behave in the same manner as bonds with regards to interest rate variations. Most of the time, the dividend is paid quarterly. Preferred shares can be exchanged and/or refunded at the issuer’s discretion, bought back at the discretion of the holder and can carry several other specific features. The main risk with this type of stock is the possibility that the expected dividends cannot be paid, which would result in a drop in the share price on the markets.