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Understanding the Concept of Stocks and Dividends
from: Maxx Trading GuidesStock and stock trading are words that most people are familiar with, but it's surprising how many people don't know what these terms really mean.
A share of stock is a unit of ownership in a company. If you, as an investor, own a share of a company's stock, you're essentially part owner of the company, which gives you a number of entitlements including the right to vote-in members of the company's board of directors. You may also be able to vote on other important matters plus you earn a proportionate shares of the company's profits should they choose to distribute to their shareholders.
Owning shares in a company and owning a company outright have several differences. Shareholders have "limited liability" which means they're protected. Shareholders have no liability if the company is prosecuted. In other words, if the company you own shares in loses a lawsuit, you wouldn't be liable. The worst that can happen is that your stocks in the company become worthless because creditors of the company can't come after a shareholder's personal assets. If you owned the business outright, the opposite is true.
There are two types of stocks the first of which is common stock, which are held by most individuals who choose to invest. Common stock holders have voting rights and are entitled to share in the dividends the company issues. Common stocks are the type of stocks referred to when you hear of a stock being “up” or “down.”
Common stocks are the most liquid, meaning they are traded on a daily basis. This is important because it gives investors an opportunity to buy and sell shares whenever they want. Many small or not well known companies may not trade daily, even with common stock, but most, likely all, large companies do offer daily trading.
Preferred stocks, unlike common stocks, actually have fewer rights. The difference lies in the payment of dividends. Preferred stock holders get first access to the company's dividends. Companies that decide to offer preferred stocks usually pay dividends on a regular and consistent basis, thus an advantage of buying preferred stocks is the regular income from these dividends. The best way to take advantage of the power of preferred stocks is to invest in companies that make huge profits.
These dividends, however, do not represent the bulk of the company's profits. Well managed companies will retain a portion of their profits for acquisitions or to repay business debts. Regardless, profiting from dividends is still one of the best ways to make money with stocks. Most companies pay dividends with cash, however, there are some who pay their investors with more stock.
Companies who regularly pay large dividends are usually well established and profitable. It's the company's long running history and their history of dividend payment that attracts investors to these stocks. However, keep in mind that downside is this stability doesn't offer opportunities for growth potential.
Dividends are determined each quarter by the company's board of directors and if, for whatever reason, the company is not doing well financially, the board of directors can decide to forego paying the dividend. Remember, there is no obligation for the compy to pay dividends to their investors. Paying dividends is a choice made by each individual company. At the quarterly meeting, if dividends are to be paid, the board of directors sets the dividend rate based on a per share basis.
Dividends usually have four important dates associated with them. The declaration date refers to the date the board of directors sets the dividend. On this date, the board of directors also announces when the stockholders will get their dividend payment (most often by check).
The record date is when the company sets forth the list of shareholders who will be paid a dividend. The investor must own stock before this date in order to be paid a share of the dividends.
The ex-dividend date is perhaps the most important. This day is normally between 2 and 4 days before the record date and is established to allow the completion of all transactions. Since it usually takes 3 days to settle a regular stock sale, the ex-dividend day allows those pending transactions to be completed. If you want to receive a dividend, the ex-dividend date is the absolute latest you can invest in the company to receive the dividend.
The payment date is the fourth and final date associated with dividends. This date is happens when the dividend checks are mailed to all shareholders. The payment date is most often two weeks after the record date.
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