An equity, or shares as is it commonly known, gives the purchaser a stake in a business. This may also entitle the owner to vote at shareholder meetings and receive profits that is allocated to shareholders. These profits are known as dividends.
Equities make money by increasing in value or by paying a dividend. However, there is no guarantee an equity will go up in value or that the business will choose to pay a dividend. Equities can also decrease in value, losing money. When an equity is sold for more than you paid for it you have a capital gain. If you sell for less, you have a capital loss.
When compared to fixed-income investments, equities can deliver much higher returns, but in-turn come with a much higher risk. You may end up with a much higher return, or a greater loss due to the increased risk.
Here is a rundown of some of the different kinds of equities available:
When you purchase a common share, you may also receive voting rights in the company. This gives you the right to elect directors and vote on certain major corporate decisions. Common shares can offer a dividend, but it is up to the directors to decide if they want to do so. If the company dissolves common shareholders have a right to a portion of the remaining assets, if any. However, their portion comes after distribution has been made to tax authorities, employees, creditors and preferred shareholders.
Restricted voting share:
These shares are equivalent to common shares, except they do not come with voting rights.
This kind of share pays a fixed dividend, or in some cases a dividend greater than paid on common shares. However, a company may reduce or suspend the dividend payments if it does not earn enough profit, or if the capital is needed elsewhere. Generally, the price of preferred shares fluctuates less than common shares, but the price may still fall if the company decides to reduce their dividend, or if the rate of return of other investment rises, in-turn making the preferred shares a less attractive investment option. If a company dissolves, preferred shareholders can receive up to face value of their shares from the remaining assets, but they still rank behind tax authorities, employees and creditors.
A flow-through share is a special kind of common share that is issued by oil and gas or mineral exploration companies. It differs by allowing certain tax deductions for qualifying, development and property expenditures to “flow through” from the company to shareholders. With resource exploration and development programs comes higher risk.
Rights and Warrants:
These provide the purchaser the right to buy additional shares from the company at a specific price during a certain period of time.
Rights allow shareholders to acquire more shares and are typically issued in proportion to the number of shares an investor already owns.
Warrants allow shareholders to acquire other securities of the company. They are offered to an investor along with the sale of another security. For example, an investor could be given a warrant to purchase common shares while purchasing restricted voting shares.