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Education Centre
Stocks
What are Stocks?
Stocks are pieces of a company. When you buy stocks or shares of a company, you're basically purchasing an ownership interest in that company. A company's stockholders or shareholders all have equity in the company, or own a fractional portion of the whole company. They buy the stocks because they expect to profit when the company profits. Companies issue two basic types of stock: common and preferred shares.Top
Common Shares
Both public and private corporations can issue common shares. Common shareholders are the owners of a company and initially provide the equity capital to start the business.
Common share ownership in a public company offers many benefits to investors. The following are some of its main advantages:
- capital appreciation
- dividends
- voting privileges
- marketability - shares can easily be bought or sold
- dividend tax credit and capital gains tax
There are also a few drawbacks to owning common shares. Although part owner of the business, common shareholders are in a relatively weak position, as senior creditors, bond holders, and preferred shareholders all have prior claims on the earnings and assets of a company. While interest payments are guaranteed to bond holders, dividends are payable to shareholders at the discretion of the directors of a company. Top
Preferred Shares
Preferred stock is a class of share capital that generally entitles shareholders to fixed dividends ahead of the company's common shares and to a stated dollar value per share in the event of liquidation. Typically, the preferred shareholder occupies a position between that of a company's creditors and its common shareholders. If a company's ability to pay interest and dividends suffers due to poor earnings, the preferred shareholder is better protected than common shareholders but worse off than creditors.
There are many different variations of preferred shares, including convertible preferreds, retractable preferreds, and variable-rate preferreds. Most Canadian preferreds are cumulative: when dividends are withheld, they accumulate in what is known as arrears. All arrears of cumulative preferred dividends must be paid before any common dividends can be distributed.
As preferred shares have characteristics of both debt and equity, they provide a link between the bond and common equity sections of a portfolio. Because there is such a wide variety of preferreds available, they are suitable investments for most investment portfolios.
One shortcoming of preferred shares is that many are non-voting. However, after a specified number of preferred dividends are withheld, voting rights are usually assigned to preferred shareholders.
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Frequently Used Terms When Investing in Stocks
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Bid
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This represents the highest price a prospective buyer is willing to pay for a security.
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Offer (Ask)
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This represents the lowest price a prospective seller is willing to accept for a security.
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Market Order
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An order to buy or sell a specified number of shares at the best available price at the time the order is received on the exchange floor. All orders not bearing a specific price are usually considered "at the market" which could mean paying the "offer" when buying or accepting the "bid" when selling.
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Limit Order
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An order for which you request a specific price that the transaction may be executed.
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Open Order
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An order which you request we keep on our records until executed or cancelled. Under RBC Direct InvestingTM policy, open orders are valid for up to a maximum of 30 calendar days.
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All or None Order
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An order which has certain restrictions placed upon it before it can be executed. The total number of shares specified on the order must be executed or else none will be bought or sold. These orders do not participate in the regular market and are executed on a best-efforts basis only.
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Any Part Order
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An any part order is the opposite of an all or none order. It means you are willing to accept any part including odd, broken or board lots up to the full amount of your request. Under RBC Direct Investing policy, full commissions and fees apply for each partial order executed, except when filled the same business day.
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Stop Buy and Stop Loss Orders
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Orders to buy or sell that are placed above or below the current market price, which become active orders when the price of a board lot rises or falls to the specified price. These orders may be placed to execute at the market, at a specified limit or within a specified price range. A stop buy order can be used to protect against losses in a short sale, whereas a stop loss order can be used to protect a paper profit or to limit a possible loss when you already own the shares. Not all stock exchanges will accept these orders. Stop buy and stop loss orders are risky because they may not necessarily fill at the specified price but at the best possible price available at that time.
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Day Order
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An order to buy or sell securities which expires at market close on the day it is taken. All orders are considered day orders unless you specify otherwise.
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Change Former Order (CFO)
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An order which changes the price or number of shares of an outstanding order.
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Cancel
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An order which completely cancels a previously entered order.
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Board Lot
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Share price under $0.10 - 1,000 shares
Share price $0.10 to $0.99 - 500 shares
Share price $1.00 and up - 100 shares
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