Investing In Canada

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Let's Talk Equity

Wednesday, September 12, 2007

Let's Talk Equity

Let's Talk Equity

When discussing Equities in North America we are really focusing on stocks. Owning a stock will provide you with partial ownership of whatever company that stock is attached to and will entitle you to certain rights with regard to that company; however, the exact details of the rights given will depend on the type of stock.

There are many different forms of stock that trade in the equity markets but there are two basic types: common shares, and preferred shares.

Common shares are the most abundant and commonly held form of stock—hence the name. Generally, common stock has voting rights in corporate decisions, and may receive dividends when declared by the company.

Preferred shares are the second most abundant. These shares have priority over common stock in the distribution of dividends and also take a priority claim to assets if a company faces liquidation due to bankruptcy. However, these shares usually have no voting authority and may be restricted to a stated dividend amount. Essentially, this could mean that if an extra dividend is declared, the preferred shareholders may not participate.

How is stock issued?

The basic method of stock issue results when a company files a prospectus with the local securities commission. Once approved, an initial public offering (IPO) is granted and the company will sell the stock to the public. Usually, the IPO is sold either totally or partially to the underwriters (companies or persons that advise the company on the offer) and these underwriters may sell directly to the public or hold the stock. Most of the time, the underwriting firms are offered the stock at a small discount to compensate them for risks that they may have taken on and compensate them for advising on the issue. This places the stock in the primary market (the market of first sale).

Once the initially sale has occurred, all subsequent sales will occur in the secondary market. This market is what we know as the stock exchanges: NYSE, Nasdaq, TSX, CVE, etc.

Buying stock on the exchanges is very simple these days. The only requirement is that you have an account opened with a brokerage firm whether it is with a bank subsidiary, financial institution or online brokerage.

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