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8. Equity Securities: Common And Preferred Shares

Learn about the key features, benefits, and risks associated with equity securities, including common and preferred shares. This section covers the nuances and impacts of stock processes and the relevance of various stock indexes.

Equity Securities: Common and Preferred Shares

Chapter Overview

In this chapter, you will learn the basic features of equity securities, a category that includes common and preferred shares. We explain the investment considerations for these categories, compare the advantages and disadvantages of each, and describe the significant role played by Canadian, U.S., and global stock market indexes.

Learning Objectives

  • Discuss the features, benefits, and risks of common share ownership.
  • Describe the impact of stock splits and consolidations on shareholders.
  • Describe the features and benefits of preferred shares.
  • Differentiate among the types of preferred shares.
  • Summarize the important stock indexes and averages.

Content Areas

1 | Common Shares

  • Discuss the features, benefits, and risks of common share ownership.

2 | Stock Splits and Consolidations

  • Describe the impact on shareholders.

3 | Preferred Shares

  • Describe the features and benefits of preferred shares.

4 | Types of Preferred Shares

  • Differentiate among various types.

5 | Stock Indexes and Averages

  • Summarize the important stock indexes and averages.

Key Terms

Key terms are defined in the Glossary and appear in bold text in the chapter.

  • Arrears: Amounts that are overdue for payment.
  • Pari Passu: A Latin term meaning “equal footing,” describing parity of securities or asset rights.
  • Callable Preferred: Preferred shares that the issuer can repurchase at a specific price after a certain date.
  • Participating Preferred: Preferred shares that allow shareholders to participate in additional profits beyond the fixed dividend amount.
  • Capital Gain: The profit realized from the sale of a security.
  • Consolidation: The process by which a corporation combines multiple shares into fewer shares, increasing the share price.
  • Convertible Preferred: Preferred shares that can be converted into a specified number of common shares.
  • Cum Dividend: Shares purchased with the right to receive the next dividend payment.
  • Deferred Preferred: Preferred shares where the dividend payment is postponed for future payment.
  • Retractable Preferred: Preferred shares that allow the shareholder to sell them back to the issuer at a predetermined price.
  • Delayed Floaters: Preferred shares with a fixed dividend rate for an initial period, which then changes to a floating rate.
  • S&P/TSX 60 Index: A stock market index representing 60 of the largest companies listed on the Toronto Stock Exchange (TSX).
  • Dividend Record Date: The date by which investors must own shares to receive the declared dividend.
  • Dividend Reinvestment Plan: Investment plan allowing investors to reinvest dividends to purchase additional shares.
  • Ex-Dividend: Status of shares sold without the right to receive the declared dividend.
  • Extra Dividend: A supplement to the regular dividend paid by a company.
  • Floating-Rate Preferred: Preferred shares with a dividend rate that varies based on an underlying benchmark interest rate.
  • Non-Callable Preferred: Preferred shares that cannot be repurchased by the issuer before a specified date.
  • Odd Lot: A stock purchase amount smaller than the standard trading unit.
  • Voting Rights: The rights of shareholders to vote on corporate matters.
  • Stock Dividends: Payment made in the form of additional shares rather than cash.
  • Stock Split: The division of a company’s existing shares into multiple shares, reducing the price per share.

Key Takeaways

  1. Common Shares: Offer ownership in a company with voting rights and potential for capital gains but carry higher risks compared to preferred shares.

  2. Preferred Shares: Provide fixed dividends and have less risk than common shares but generally don’t offer voting rights.

  3. Stock Splits and Consolidations: Affect the number of shares and possibly the investment’s value but don’t change the total market value held by investors.

  4. Stock Indexes and Averages: Serve as indicators of overall market performance and help investors gauge market trends.

Frequently Asked Questions (FAQs)

Q: What are the main differences between common and preferred shares?

A: Common shares offer voting rights and potential for capital growth, while preferred shares provide fixed dividends and less risk but typically lack voting privileges.

Q: How does a stock split affect my shares?

A: A stock split increases the number of shares you own but decreases the price per share proportionally. The total value of your investment remains unchanged.

Q: What is a convertible preferred share?

A: A convertible preferred share allows you to convert preferred shares into a specified number of common shares, combining features of fixed dividends and potential capital gains.

For further detailed terms and definitions, please refer to the glossary section of the chapter.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## Which of the following is a key feature of common shares? - [ ] Guaranteed dividends - [ ] Priority claim on assets during liquidation - [ ] Fixed dividend rate - [x] Voting rights > **Explanation:** Common shares provide investors with voting rights in corporate decisions. They do not guarantee dividends and rank lower in claim on assets during liquidation compared to preferred shares. ## What is the primary benefit of owning common shares? - [ ] Guaranteed fixed income - [ ] Lower risk compared to bonds - [ ] Priority in dividend payments - [x] Potential for capital gains > **Explanation:** The primary benefit of owning common shares is the potential for capital gains as the stock's value appreciates. Common shareholders are not guaranteed fixed income and have a higher risk compared to bondholders. ## What impact does a stock split have on a shareholder's investment? - [ ] Increases the overall value of the investment - [ ] Decreases the overall value of the investment - [ ] Has no effect on the number of shares owned - [x] Increases the number of shares owned without changing the total value > **Explanation:** A stock split increases the number of shares a shareholder owns without changing the overall value of the investment. It essentially adjusts the share price and the number of shares proportionately. ## What is meant by 'cum dividend'? - [ ] Shares purchased without the right to receive the declared dividend - [x] Shares purchased with the right to receive the declared dividend - [ ] Shares bought after the dividend record date - [ ] Shares that do not pay any dividends > **Explanation:** 'Cum dividend' means that the shares are traded with the right to receive the declared dividend. Shares bought before the ex-dividend date are 'cum dividend'. ## Which type of preferred share allows shareholders to convert them into a specified number of common shares? - [ ] Callable preferred - [x] Convertible preferred - [ ] Retractable preferred - [ ] Variable-rate preferred > **Explanation:** Convertible preferred shares allow shareholders to convert them into a specified number of common shares, providing potential for capital appreciation. ## What is an odd lot? - [ ] A portion of shares that is exactly 100 shares - [ ] A portion of shares that is more than 100 shares - [x] A trading order for a number of shares that is less than the standard trading unit - [ ] A trading order involving only preferred shares > **Explanation:** An odd lot is a trading order for a number of shares that is less than the standard trading unit, typically less than 100 shares. ## What does the S&P/TSX 60 Index represent? - [x] The top 60 companies listed on the Toronto Stock Exchange by market capitalization - [ ] The 60 most actively traded stocks on the Toronto Stock Exchange - [ ] The 60 highest yielding common shares in Canada - [ ] The 60 top-performing stocks in the U.S. market > **Explanation:** The S&P/TSX 60 Index represents the top 60 companies listed on the Toronto Stock Exchange by market capitalization and is a key benchmark for Canadian equities. ## What feature do straight preferred shares have? - [x] Fixed dividends without additional benefits like conversion or participation - [ ] Dividends that increase based on company profits - [ ] The ability to convert into common shares - [ ] Retractability > **Explanation:** Straight preferred shares offer fixed dividends but do not have features like convertibility or participation. They have less complex features compared to other types of preferred shares. ## What are participating preferred shares? - [ ] Preferred shares that do not pay dividends - [ ] Shares that have no fixed dividend rate - [x] Preferred shares that allow shareholders to receive additional dividends beyond the fixed rate - [ ] Shares that cannot be converted to common shares > **Explanation:** Participating preferred shares allow shareholders to receive additional dividends beyond the fixed rate based on the company’s performance. ## What happens during a stock consolidation? - [x] The number of outstanding shares decreases and the share price increases proportionately - [ ] The number of outstanding shares increases and the share price decreases proportionately - [ ] The overall value of the investment changes - [ ] The dividends paid per share are reduced > **Explanation:** Stock consolidation, or reverse stock split, decreases the number of outstanding shares while increasing the share price proportionately. The overall value of the investment remains the same.

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In this section

  • 8.1 Introduction
    An introduction to equity securities with a focus on common shares, comparing their long-term performance against bonds and inflation.
  • 8.2 Common Shares
    Comprehensive guide to common shares, covering features, benefits, risks, stock splits, consolidations, key terms, and more for the Canadian Securities Course.
    • 8.2.1 Benefits And Risks Of Common Share Ownership
      Understanding the benefits and risks of common share ownership is crucial for investors seeking to maximize returns and minimize risks. This guide explores key aspects such as capital appreciation, voting privileges, and limited liability, alongside potential risks like market volatility and dividend uncertainty.
    • 8.2.2 Capital Appreciation
      Understand the concept of capital appreciation in the context of common shares, and how it impacts investors' decisions.
    • 8.2.3 Dividends
      Explore the essential details about dividends in equity securities, including dividend policy, payment methods, ex-dividend dates, dividend reinvestment plans, and stock dividends.
    • 8.2.4 Voting Privileges
      This guide explores the rights of shareholders in the context of voting privileges, focusing on various types of shares, including restricted shares, and their impact on shareholders' participation in corporate governance.
    • 8.2.5 Stock Splits And Consolidations
      Understand the basics and strategic importance of stock splits and reverse stock splits (consolidations) for publicly-traded companies. Learn how these actions can influence share prices and investor perception.
    • 8.2.6 Reading Stock Quotations
      Learn how to read and interpret stock quotations for listed and unlisted stocks traded on stock exchanges and over-the-counter (OTC) market.
  • 8.3 Preferred Shares
    Explore the features and benefits of preferred shares, understand different types of preferred shares, and learn how to differentiate among them.
    • 8.3.1 Preferred Shareholder’s Claim To Assets
      Understanding the preferred shareholder's claim to assets, their priority status over common shares in the event of bankruptcy, and their entitlement to fixed dividend payments.
    • 8.3.10 Other Types Of Preferred Shares
      Learn about the various less common types of preferred shares such as participating preferred shares and deferred preferred shares, including their features, advantages, and practical applications in investment strategies.
    • 8.3.2 Why Companies Issue Preferred Shares
      In-depth exploration of why companies issue preferred shares as opposed to debt or common shares, evaluating the benefits and considerations involved.
    • 8.3.3 Why Investors Buy Preferred Shares
      This section explores the reasons why investors, including both individual and institutional investors, buy preferred shares, highlighting benefits such as dividend tax credits and preferential tax treatment.
    • 8.3.4 Preferred Share Features
      Learn about the key features of preferred shares including cumulative and non-cumulative features, callable and non-callable features, voting privileges, and special funds like purchase and sinking funds.
    • 8.3.5 Straight Preferred Shares
      Learn about Straight Preferred Shares, their features, market behavior, and benefits for investors. Explore an example to understand yield dynamics.
    • 8.3.6 Convertible Preferred Shares
      An in-depth guide to understanding convertible preferred shares, their characteristics, benefits, and how they differ from straight preferred shares.
    • 8.3.7 Retractable Preferred Shares
      Learn all about Retractable Preferred Shares, their characteristics, and examples. Understand key features that affect their value and how they compare to other financial instruments in volatile market conditions.
    • 8.3.8 Floating-rate Preferred Shares
      A comprehensive guide to understanding floating-rate preferred shares, including their market conditions, examples, characteristics, and implications for buyers.
    • 8.3.9 Foreign-pay Preferred Shares
      Learn about the structure, benefits, and risks of foreign-pay preferred shares issued by Canadian companies, along with an illustrative example.
  • 8.4 Stock Indexes And Averages
    Learn about the important stock indexes and averages, their purposes, calculations, and key differences with examples.
    • 8.4.1 Canadian Market Indexes
      Comprehensive guide on Canadian Market Indexes including details on S&P/TSX Composite Index, S&P/TSX 60 Index, and S&P/TSX Venture Composite Index.
    • 8.4.2 U.S. Stock Market Indexes
      An in-depth overview of major U.S. stock market indexes, including the Dow Jones Industrial Average and the S&P 500. Detailed explanations of their composition, calculations, and their usage as market performance indicators.
    • 8.4.3 Other U.S. Stock Market Indexes
      An in-depth guide covering various significant U.S. stock market indexes including NYSE Composite, NYSE American, NASDAQ Composite Index, and Value Line Composite Index.
    • 8.4.4 International Market Indexes And Averages
      This section provides a comprehensive understanding of various international market indexes and averages, which are crucial for investors looking to diversify their portfolios globally.
  • 8.5 Summary
    An in-depth look at key concepts of common and preferred shares, including their benefits, rights, and different types.
Sunday, July 21, 2024