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Stocks are securities that represent ownership interest in a corporation. Corporations issue stock to raise funds for the company. There are three primary reasons investors may choose to incorporate long-term, quality stocks in their portfolio:
HIGHER RETURNS: Over a long period of time, stocks have almost always provided higher returns than other investment alternatives.
RISING INCOME: Stocks offer the potential for rising income through dividend growth. Rising income helps protect investors against inflation.
DIVERSIFICATION: Stocks, combined with other types of investments, can help reduce the uncertainty of future portfolio returns, compared to owning only one type of security.
COMMON STOCKS: When you buy a stock, you become part owner of a company. As an owner, you are usually entitled to voting rights and to a share of the company’s profits, a portion of which are distributed in the form of cash dividends. Dividends are not guaranteed. They may be increased if the company performs well, but they may also be reduced or eliminated if the company performs poorly.
Objective: Stocks can be purchased for a variety of investment objectives, including current income, growth of principal or a combination of both.
Suitability: Stocks are suited for long-term investors who recognize that they assume greater risk in return for potentially greater rewards.
- Growth of Principal: Equity investments, such as common stocks, allow for growth of principal and increasing dividend income, usually as a result of increasing earnings per share.
- Potentially Higher Returns: Although past performance is no guarantee of future results, over longer periods of time, stocks have generally outperformed other financial investments and provided returns well above the rate of inflation.
- Risk: Risk is measured in terms of how much a stock changes over a period of time. Some stock prices have a high degree of volatility, or risk, while others are more predictable and do not change much on a daily basis.
- Tax Advantages: Under current tax laws, capital gains earned on long-term stocks are not taxed until the stocks are sold.
- Liquidity: Can be bought or sold on any day at their current market value, which may be more than, equal to or less than initially invested.
PREFERRED STOCKS: Preferred stock has characteristics of both stocks and bonds. Like common stock, preferred stock represents ownership in a company. This ownership entitles you to a share of the company’s profits, a portion of which is paid in the form of cash dividends. Most preferred stocks carry a fixed dividend that does not change.
Although this dividend is not guaranteed because the stock is preferred, a preferred stockholder is entitled to dividend payments before common stockholders. Many preferred stocks resemble bonds in that they pay a fixed amount of income (in the form of dividends) and they have call features that allow the company to buy it back in the future. Most preferred stocks have no maturity date.
Objective: To provide long-term investors with current income.
Suitability: Generally suitable for investors seeking income outside of a Registered Retirement Account.
- Tax Advantages: The dividend income earned on a preferred stock qualifies for the dividend tax credit.
- Safety: Most dividends paid on preferred stocks are cumulative. This means that, should the company miss any dividends, the payments will accumulate and be owed to the investor when the company is able to pay.
- Payment Schedule: Nearly all preferred dividends are paid quarterly.
- Dividend Rate: The most common type of preferred stock carries a fixed dividend that never changes. For this reason, preferred stock prices behave like bonds.
- Liquidity: The majority of preferred stocks trade on the Toronto Stock Exchange. Preferred stock may be more difficult to sell than common stock because there is generally less demand for this type of stock.
- Callable: Preferred stock usually has a redemption date. This means the company that issues the preferred stock can buy it back at this time at a predetermined price.
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