Types of shares

Looking more closely at equity investments, this week we look at common, preferred and restricted voting shares.

When you own common shares you have the right to elect directors and to vote on certain major corporate decisions. You gain (or lose) money based on the company’s performance. Companies do not have to pay a dividend. Many larger, established companies try to pay regular dividends. Others may not pay a dividend because they are not profitable or they choose to reinvest their earnings.

Restricted voting shares are generally the same as common shares, but (as expected) the voting rights of the holder are restricted.

Preferred shareholders generally do not have voting rights, but may be offered special features such as the right to redeem their shares at certain times or to convert their shares to common shares at a certain price. Preferred shares pay a fixed dividend, though a company may reduce or suspend dividend payments if, for example, it does not earn enough profit or needs to preserve its capital.

In general, the prices of preferred shares tend to fluctuate less than those of common shares. However, the prices of preferred shares may fall if:

• the company plans to reduce or reduces dividends
• the rate of return of other investments increases, making preferred shares relatively less attractive

If a company dissolves, preferred shareholders have a right to receive up to the face value of their shares from the company’s remaining assets. They rank behind tax authorities, employees and creditors but ahead of common shareholders, who also have a right to a portion of the remaining assets.

This has been the eighth post in our Investments at a Glance Series. Next we examine flow-through shares, rights and warrants.