Equities Back to Basics
Whether your goals include saving for your retirement or your children's education, investing can help you achieve your long-term financial goals. When you first begin investing, one of the most important decisions you'll have to make is where to put your money. Sounds pretty simple. But with over 2,000 mutual funds and 14,000 stocks to choose from, where do you begin? By first having a solid understanding of the types of investments that are available to you and what each has to offer, you'll be armed with the confidence and knowledge to make sound investment decisions.
Equities, stocks and shares
"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 include:
- The right to receive any common share dividends paid by the company
- Favourable tax treatment of dividend income and capital gains
- Marketability - share holdings can be increased or decreased
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. Some companies offer a dividend reinvestment plan whereby declared dividends are automatically used to purchase additional stock for its shareholders.
Favourable Tax Treatment
The dividends received from common share ownership of Canadian Companies 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.
To find out more about the importance of including equities in your long-term financial plan, speak with a CIBC Wood Gundy Investment Advisor.
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The information contained herein is considered accurate at the time of posting. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only.