“Equities”, “stocks”, and “shares” are three words that often mean the same thing. If you invest in an equity mutual fund, you indirectly own common stocks or shares. Common shareholders are the owners of a public company and provide the equity capital to carry on or expand the business. If the business prospers, common shareholders may receive dividends, or make capital gains if their shares are sold at a profit. If the business fails, common shareholders may lose their entire investment.

The rights and advantages of common share ownership are as follows:

• Potential for capital appreciation
• The right to receive any common share dividends paid by the company
• Voting privileges
• Favourable tax treatment of dividend income and capital gains
• Marketability – share holdings can be increased or decreased

Capital appreciation can derive from an increase in the share price or from stock splits. The price of shares follows the law of supply and demand - if many people want to buy a stock, the price goes up. Demand is usually based on the value that people see in the company issuing the shares. This can be present value (in the case of a highly profitable company) or future value (in the case of a company with small current profits but a bright future).

Because most companies prefer to keep their share price in a popular range from $10 to $100, a stock split may be used to bring a high-priced stock back into this range. If you own 50 shares of a $100 stock and it splits two-for-one, you will own 100 shares of a $50 stock. If it splits four-for-one, you will own 200 shares of a $25 stock. The total value is unchanged, just divided among more shares.

Common stock dividends may be paid by a company if there are profits left after paying expenses, bond interest, debenture interest and preferred dividends. The board of directors determines the dividend policy, and mature companies may pay dividends while growing companies may retain their earnings to fund future growth. Some companies designate a specific dividend that will be paid each year, while others prefer to retain dividend flexibility.

Dividends are included in determining the annual yield for a common stock, with regular dividends usually increasing the demand for the stock and the stock price.

Some companies offer a dividend reinvestment plan whereby declared dividends are automatically used to purchase additional stock for its shareholders.

The dividends received from common share ownership have preferential tax treatment over the interest received from corporate bonds. This is to avoid double taxation since interest payments on bonds, but not dividend payments on stocks, are tax-deductible by the company. If you sell stocks, or shares in equity mutual funds, at a profit, you will earn capital gains, which also have preferential tax treatment over interest income.

Marketability is an attractive feature of common share ownership. If you hold equity mutual funds, however, the ease of purchase, transfer, and redemption of the fund shares becomes the important issue, not the marketability of the underlying stocks.

Nevertheless, mutual fund managers investing in the stocks of large corporations that have many shares outstanding (called large-cap stocks) may have more flexibility when moving in and out of the market. While stocks were once used to build character, now they can be used to build the foundation for a strong investment portfolio.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

For more Information: 
Ryan Taves, CFP – Investment Advisor CIBC Wood Gundy 
6th Floor, 730 View Street 
Victoria B.C. 
Phone: 250.361.2246 
Email: ryan.taves@cibc.ca 

CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.

Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2010.