Equities come with certain rights including the voting rights to which the investors are entitled. The level of corporate control depends on whether the equity is classed as ‘ordinary’ or ‘preferred’ and on the size of your shareholding.
Ordinary shares represent the majority of shares held by investors. When you own an ordinary share of a company, you usually have one vote per share that entitles you to participate in the election of the board of directors.
Despite their name, preference shares have fewer rights than ordinary shares, except in one important area – dividends. Companies that issue preference shares usually aim to pay consistent dividends and preference shareholders have ﬁrst call on dividends. In the event that a company is liquidated, preference shareholders have prior claim to assets over ordinary shareholders. This feature allows the company to raise capital from venture capitalists before it goes public because most venture capital deals are structured as preference shares.
One of the unique features of owning equities is the notion of limited liability. This means that when you own equity in a company and in the event that company loses a lawsuit and must pay a large settlement, creditors can’t come after your personal assets. Your liability is limited to the amount invested in the company.
While equity markets have historically produced higher returns than cash or fixed income over the longer term, the risk of capital loss exists especially over the shorter term. You should be aware of the risks of investing and speak to a qualified financial adviser to determine if an investment in equities is suitable for you.
As markets are not always efficient, using an active manager may also help to manage risks and improve performance. A good manager can identify undervalued securities to invest in by carrying out their own research on sectors and companies, including face-to-face meetings with management to determine the intrinsic value of a company’s share price.
1. Australian Share Exchange, Australian Share Ownership Study, November 2012
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.