Preferred Shares vs Common Shares: Legal Implications that must be understood before investing.

I recently read a news article written by an investment advisor about the benefits of investing in preferred shares. At first glance this article seems to be extremely accurate, at least from a financial perspective. For example, I presented the ‘bare bones’ of this case to some of my colleagues (investment professionals) and none seemed to have any major quarrels with any aspect of this article. It seems the legal implications of many of the statements made throughout this article are not held as common knowledge by the majority of investment professionals, which is unnerving as these are the people whom are though to have specialized knowledge with regards to all aspects of investing.

Discussing the investment terms presented in this article seemed basic and at first I was uninterested. Financial professionals distinguish between two kinds of shares on a daily basis: preferred shares and common shares, but is it really that plain and simple?
Preferred shares are thought of more as a debt security as the article suggests. The general consensus is exactly the position of the article: a regular fixed dividend, a chance of share appreciation, leading position over common shareholders when a company is wound up, and no voting privileges. After income taxes, preferred shareholders are though to collect their dividends ahead of the common shareholders and these dividends are also thought to accumulate if not paid.

The article goes on to discuss different terms that are very regular with preferred shares. Preferred shares tend to be bought for their regular cash flows and as a result, like debt, their price appreciates when interest rates fall and vice versa. Common features of preferred shares are presented in the article: retractable / callable, the shares may be bought back by the company at the company’s or unit holders option…they may participate in profits through extra dividends…some have variable dividends with a floating rate…and they may have warrants attached or be convertible to Common Shares.

Common Shares on the other hand are though to carry the right to vote to elect the board and the right to receive dividends when they are declared; upon windup they are thought to receive the last ‘pick at the pie’.

Even a seasoned investment professional would not appeal the presentation of preferred shares provided in the article; however, from a legal perspective there are many incongruent statements produced that should be understood by all professionals in the investment industry, especially if they want to avoid any potential law suits.

The first thing to notice is what kinds of securities the law distinguishes. The consensus is wrong to automatically think common and preferred shares. These are not kinds of shares, only marketing jargon. Within the law in British Columbia there are two kinds of shares according to S.52 of the Business Corporations Act (BCA): par and non par. Par shares meaning they have a stated value on the books, while non-par shares have no underlying value. This distinction comes from old law that sought to keep previous owners and new share owners on equal grounds when purchasing shares; however, the majority of Provinces today no longer allow for par shares, and instead require all shares to be of the non-par variety.

The second thing to notice is what a share actually is. From a financial perspective, even many professionals still believe that a share is a part ownership in the underlying business. This is incorrect however. The legal definition of a share is a ‘choses in action’ or ‘the right to sue’. What shares really are is a bundle of rights produced by the constitutional documents of a company according to S.56 of the BCA; the name preferred and common have no legal distinction within the BCA.

Some other key features of shares may be clarified by discussing major sections of the BCA with regards to the legal nature of shares. S.107 provides that a share certificate is produced when shares are created; these days it is uncommon for the certificate to be transferred to a share owner, instead the certificates are held in trust. S.111 provides that a central list of the share owners is kept by the corporation, which includes the number and class of shares held and the amount held by each share holder.

The next major sections to notice are S.113 and S173. S.113 states that a share is transferable as provided by the articles of the company. This may affect the liquidity of the shares and should be known before purchasing. S.173 provides that unless the articles state otherwise, all shares carry one vote per share. This could have major implications on the actions taken by the company since without restriction, common and preferred shares will have the same vote.
One of the more interesting sections of the BCA governing shares includes S. 64, which states that a share must not be issued until it is fully paid; however, a share can be paid in a number of ways: money, property, or past services actually performed.

Now that some of the more prominent sections of the BCA have been discussed it may help to clarify the distinction of classes of shares by looking at some case law. From International Power v. McMaster for example, the judge makes it clear that calling a share common versus preferred does not determine which shareholders participate in the residue of a company when it is wound up. The distinction is made through the articles of incorporation and if there is no distinction or restriction made then all classes of shares will participate equally in any residue.

A further application that we learn from the case of Devall v. Wainright Gas Co. Ltd is that dividends, even if stated in the articles as cumulative are not payable unless and until the board declares them. If the board deems it more beneficial to the company to setup a reserve fund then the board is not incorrect in doing so as long as it is in the company’s best interest.

Common and preferred shares are not as easily distinguishable and generic as I once thought. The most important thing to remember is that the constitutional documents will determine the exact rights and restrictions on the different classes of shares. Understanding the exact details provided from these documents can dramatically affect the liquidity (ease of share transfer), and value of a security. It is very surprising that the legal implications of share rights and restrictions are not even discussed within the Canadian Securities Course or Canadian Practices Handbook—the financial industry licensing requirements. Hopefully the Canadian Securities Institute, investment licensing body, will update their training materials to include such important lessons in the near future.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio

Investing in the Adult Industry: Loads of money to be made, but who will invest?

Former hedge fund specialist Francis Koenig in 2005 founded the first institutional investment company to focus specifically on sex industry related investments. Koenig has gone from Wall Street to Los Angeles and believes there are fortunes to be made by matching adult entertainment companies with investors.

This is not the first time an ethically sensitive investment situation has been highlighted in the stock market; there are companies that focus strictly on gambling / casino investments, war / weapons investments, etc. These industries are all very profitable and even from a first glance you can tell the adult industry will be no different.

We have all heard of the brands: Playboy, Hustler, Vivid, etc. Most can even put a face to the names: Hugh Hefner, Larry Flint, etc.

But did you know:

25% of all internet searches involve the adult services industry!

So what is wrong with all these investments?

This is really a question about ethics and how far down the rabbit hole you want to go. If you motivation is strictly to profit in the stock market then all these ethically sensitive investments can produce healthy returns. Sometimes the more outrage something produces the better. More outrage means the topic will remain a media hot button issue and will remain within the headlines and types of companies love the attention; ‘there is no publicity like free publicity.’

However, if you hold yourself to a higher moral standard you may want to rethink some of these investments. If you decide that you do not want to be a part of such investments you need to be more active than the average investor. This requires investigation because not many investors actually know what they are investing in when they buy a mutual fund or even a stock index.

All mutual funds will have to disclose the investments that they have participated in over a given year to investors; however, they do not need to go any further. The next question is what did these companies that the fund I invested in, invest in? This is where the investigation becomes a bit more difficult, but you can see the cycle will continue…what did these companies that the fund invested in, invest in, and what did those investments invest in….?

So it all comes down to personal preference…making money is one thing we all want, how we make that money is up to the individual.

This article was written as a response after viewing a recent press release on msnbc.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.

How to Profit: Oil and Gas Crack Spread

Oil and Gas Crack Spread: How to Profit from an unrealistic Spread.

Spread out of whack: Natural Gas Crack Spread

When you hear oil and gas futures traders talking about the crack spread what they really mean is the difference between the price of crude oil and petroleum products extracted from it. The ‘Crack’ can be though of as cracking raw oil into the various components that it will become when processed: gasoline, kerosene, diesel, heating oil, jet fuel, asphalt, etc.

Normally, futures traders will focus on the crack spread for gasoline and heating oil. During the winter the focus tends to be on the heating oil crack spread while the remainder of the years the focus tends to be on the gasoline crack spread.

Large Oil refiners and oil and gas companies may trade crack spreads to hedge price risks for the products that they offer while speculators will try and predict where the market is heading and profit from the change in oil vs gas/heating old differentials.

Speculating on the various crack spreads is for more sophisticated investors; however, it does not need to be a difficult thing. Many of the large commodities exchanges have simplified the trades needed to perform such strategies. The NYMEX for example offers virtual crack spread futures by combining a basket of underlying futures contracts that correspond to the various oil production outputs. With the basket futures you only need a single transaction to organize a trade as opposed to buying and selling a full basket of futures yourself to participate.

So what should I be looking for to make money?

When crude oil rises:

If other products appear to be flat or more up in price to a lessor degree then the crack spread will be diverging. These spreads tend to remain within a range that could be correspondent to actual costs associated with their production. A large jump in oil prices without a corresponding large jump in gasoline prices for example, throws the spread outside the comfort zone. As a speculator you are look to spot that divergence and profit from it.

How to profit: When there is a divergence as above, to profit you would shot sell the crude futures contract and buy the gasoline or heating oil futures contract with the same expiry to keep things simple.

When the price of oil falls and the crack spread narrows:

Under this scenario you would just do the opposite: sell the crude oil futures contract and buy the gasoline or heating oil futures contract. Again, keep things simply and just use the same expiry dates.

The Basic Rule of Thumb: Sell the overpriced product and Buy the under priced product.

If you do not understand futures they you can also perform these trades using options

Google Earth Investment Application:

Investment Opportunities in Canada

To Income Trust or not to Income Trust: Looking for Capital Gains from Income Trusts and a Steady Income Stream.

If you have been invested in the market recently then you have experience the major shock waves of highs and lows. Everyone is looking for the next big growth story, but what about a nice Capital Gain coupled with a steady flow of income?

Income Trusts have seen better days. Everyone has had their hate on this instrument and it is reflected in market prices. The first blow was the Conservative Governments change to the tax consequences of owning Income Trusts and the pain did not stop there. There has been a negative sentiment about these assets every since and again we are seeing 56 week lows. I also experienced this pain, but these are growing pains and you can’t make the next milestone without stretching.

This sound’s like opportunity knocking at the door: who doesn’t want to buy a nice steady income stream on the cheap? All those disgruntled investors that lost as a result of the new tax implications that is who.

But how long can this negative sentiment last?

It will last until you see a small group enjoy the great returns that Income Trust produce when purchased at the right time and it is too late to enjoy the full benefits of being an early wagon hopper. The right time may be now or it may be in the future; however, I’m betting on a near term appreciation and love the fact that I can by a high yielding trust for cheap.

If your interested in Income Trusts you need to do the proper research to find one or a few that are right for your portfolio. The best thing to do is to consult with a professional investment advisor who can help you make the right decisions.

Here is a list of Income Trusts that I am currently following and discussing with my investment advisor:

Bonnett’s Energy Services Trust (BT.UN: TSX)

Canfof Pulp Income Fund (CFX.UN: TSX)

Deepwell Energy Services Trust: (DWL.UN: TSX)

Enerflex Systems Income Fund (EFX.UN: TSX)

Enervest Diversified Income Trust: (EIT.UN: TSX)

Progress Energy Trust (PGX.UN: TSX)

Sentry Select Diversified Income Trust: (SDT.UN: TSX)

Strategic Energy Fund: (SEF.UN: TSX)

Stoneham Drilling Trust (SDG.UN: TSX)

Trinidad Energy Services Income Trust (TDG.UN: TSX)

Wajax Income Fund (WJX.UN: TSX)

Canadian Dollar: How to make money on the increasing value of the Canadian Dollar.

The Canadian Dollar hit a 130 year high on November 7, 2007 at $1.1027 (U. S.). This new valuation of the dollar will take some getting used to. Already there have been some business outcries for the Bank of Canada to step in and lower rates to cool off the appreciating dollar. This I do not believe to be the proper course nor do I think the economic situation to be so dire.

There are a number of reasons why the Bank of Canada should not step in.

First, lowing interest rates will only cause inflation throughout the Canadian Economy. The primary responsibility of the Bank of Canada is to keep inflation reasonable stable between 1-3% a year. Currently we are sitting at 2.5% and that is exactly where we should be.

Second, suggesting that a higher Canadian dollar will cause massive job cuts is ridiculous. The unemployment rate is near record lows; talk a walk down the street in Vancouver or Calgary and you will find it impossible not to be inundated by all the help wanted ads. These jobs won’t completely dry up just because our goods have become more expensive for Americans.

Third, all the banter about cutting rates is coming from the manufacturing sector. It has been displayed overtime that situations such as a higher dollar only leads to efficiency. Either become more cost efficient at producing or you shouldn’t be producing at all. This is the type of situation that yields major innovations.

Fourth, the U.S. Dollar is depreciating relative to all major currencies. The world has become a much more global atmosphere than we have seen in the past and as a result markets are able to react much more efficiently. As a result, by lowering interest rates the Canadian Economy will not keep pace with the other major currencies.

Fifth, there is a global power shift going on. The U.S. has been the dominant economy for many decades and that is changing as economies like China, India, and even the European Union as a trading block fight to become the new dominant trading powers. While this competition occurs, Canadian exports will shift from the U.S. to these other areas.

Sixth, Canada is resource rich and Uncle Sam is hooked. Canada dominates the commodities market because it is the safest source of oil, gas, metals, energy, etc. The world sets the prices for these commodities so the United States will keep coming back to Canada to buy these inputs as the price will not be affected by a higher dollar.

How to Make Money with the Soaring Canadian Dollar:

There are a number of ways to do this and I will describe a few:

1) Simply buy in to the Canadian Economy. The simplest way and safest way to do this would be to purchase some high grade Canadian Government or Corporate Bonds. These will yield a respectable percentage, most likely between 4 and 7 percent and at the same time you may also extent your return through a tax free currency appreciation.

2) Buy the TSX index. This way you are diversified and can reap the benefits of an expanding Canadian economy. The TSX has averaged over 10% annually over the past number of decades.

3) Buy the Canadian Banks: the Banks have outperformed the market significantly over the past decade. There are a lot of smart people working at the banks and they always seem to find better investment opportunities than even a sophisticated individual. Take the old adage 2 heads are better than one and augment it to 1000 heads are better than one.

4) Buy Commodity Stocks: don’t sit on the sidelines. If commodities are hot like they are and there is a global infrastructure boom going on and increasing buy, buy, buy. Lot for the next big commodity. Currently my favorites are uranium and natural gas as both should see boom times again soon.

5) Buy Companies that service Commodity Companies: These companies experience a boom at the same time as there are more new projects to service.

6) Be a Manufacturing Vulture: look for large quality manufacturing companies that the market

has hammered as a result of the higher Canadian dollar. This is when these companies are innovative and develop better efficiencies. When they become more efficient they become more profitable and huge gains can be made.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.