What are some common terms associated with common shares?

Par Value or no Par Value: Common shares may be issued with a stated Par Value, which is the share’s declared face value, or they may not have a Par Value stated. The Par Value may differ from the share’s actual value or stock market price, but at the time of issuance the Par Value would have represented a calculated proportional value.

Voting/Multiple Voting or Non-Voting Shares: A company may issue more than one type of share and each share class will carry its own characteristics. The majority of common shares give the owner a right to vote on corporate initiatives and typically the owner has the right to one vote for each individual share owned. In some cases, a company may issue Non-Voting or Multiple Voting shares. These are generally issued to expand the company’s ownership and capital base, while maintaining the same voting control concentration.

Dual class share structures are often used where it is desirable to retain voting control of a company with a small group of shareholders without restricting the company’s access to equity markets.

Dividends: A company’s Board of Directors may, from time to time, declare the company is in a financially strong position and therefore can afford to pay a dividend to its existing shareholders. The dividend can be in the form of a cash payment or by the issuance of additional shares. Most companies will set guidelines, which dictate the conditions necessary for the payment of a dividend. The Board of Directors must review and approve every common share dividend payment, regardless if the payment has historically been quarterly or if it is a special “one-time” payment.

Taxation: Dividends are paid by the company from after-tax income and therefore are not a tax-deductible expense for the corporation (unlike the interest payments for bond/debt securities). As a result, dividends are paid out of the company’s after-tax income.

Common shareowners receive the dividend payments which in Canada are taxed at a lower income tax rate, provided the shares are issued by a Canadian Issuer and they the shares are held within a taxable account.

If an investor’s common shares are held within a taxable account, any change in the share’s price above or below the original purchase price is treated as a Taxable Capital Gain or Loss and receives preferential income tax treatment.

Individuals, corporations, trusts and governments can own common shares or stocks.

Shares Issued: At the time of incorporation, the company’s maximum Authorized Capital will be established. This maximum will state the maximum number of shares a company may issue to investors.

The number of shares issued by a company can be important for an investor. The number of shares issued by a corporation is fundamental in assessing a company’s current share value, future potential value and the share’s liquidity.  The company’s common share history is also important because each additional share issued will dilute the share value for existing owners and every share repurchased should add value.

For example, if a company earns $100.00 in profit and has 100 shares issued and outstanding, then the stock market often attributes $1.00 of earnings for each common share, or $1.00 of earnings per share.

Now if the company issues an additional 100 common shares, while still earning $100.00 in profits, then there is only $0.50 of earnings per share.

And vice versa, if the company repurchases 50 of the issued and outstanding shares and earns the same $100.00 in profits then it can be said that the common shares have $2.00 in earnings, per share.

The stock market considers share repurchases as a positive for the share’s market value, unless the purchase is a result of financial problems at the company.

A company that reduces the number common shares outstanding through a Reverse Share Split or Share Consolidation is not considered to be a positive for shareholders and the stock market typically does not reward such a change with a higher net share price.

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