Investor Toolkit: How to pick the right class of shares

Every Wednesday, we publish our “Investor Toolkit” investing advice series. Whether you’re a new or experienced investor, these weekly updates are designed to give you our specific advice on successful investing. Each Investor Toolkit update gives you a fundamental piece of investing advice and shows you how you can put it into practice right away.

Tip of the week:“It can be profitable to pay a little more for your shares.”

Some Canadian companies, such as Bombardier and Teck Resources, have two classes of common shares: voting and non-voting (or multiple voting and subordinate voting).

The two classes get the same or almost the same dividend. The main difference: holders of voting or multiple-voting shares control the company. Non-voting and subordinate-voting shares only have meaningful voting rights in extraordinary circumstances.

Companies with multiple share classes often have a so-called “coattails provision.”This provision aims to ensure that both share classes have equal rights in the event of a takeover. So, if you hold non-voting or subordinate-voting shares, you won’t miss out on a takeover bid.

Non-voting shares trade more actively than the voters, usually at a slight price discount. But successful investors focus on finding investments that you can stick with indefinitely, so they put a lower priority on liquidity. They may pay a little more for the voting shares. Here’s our investing advice on which class to buy:

  1. Always choose voters if they trade at a premium of 5% or less over non-voters. Chances are you’ll get the premium back when you sell, and the voting stock won’t go below the non-voting. But the voting-stock premium could balloon to 20% or more in a takeover.

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  1. Choose non-voting shares if the voters trade at a premium of 10% or more. If takeover interest wanes, the premium may shrink to 5% or less. If there is a takeover, the coattails provision may apply. If so, the premium on the voting shares should evaporate.
  2. If the voting-stock premium is between 5% and 10%, base your decision on your own temperament and judgment. If you’re an aggressive investor and a takeover bid seems likely, you may prefer the voting stock. Follow the investing advice your circumstances dictate.

Whenever premiums exceed 5%, however, many conservative investors routinely choose the cheaper non-voters. They see themselves as investors, not gamblers.

As a member of TSI Network, you may have already seen our investing advice in “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.” If you haven’t yet read this free report, click here to download your copy today. I’d also encourage you to email the report to friends. It’s my “thank you” just for signing up for my free daily updates.

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