People who live secure retired lives are the ones who made wise investments in their heydays. One of the high risk and high return investments that one could opt for is investment in stocks. There are various types of stocks that you could opt for; varying in price range and other details. There are stocks that pay dividends and stocks that don't. For those who are new to stock investing or are buying stocks for the first time, let me briefly discuss what stocks are and what are the benefits of investing in them.
What are Stocks?
A stock represents a quantum of ownership in a company. So when you buy a stock, you become a partial owner of the company as you get a slice of its equity. A company goes public and sells a part of its equity holding for raising cash for the company. The stocks sold by the company can be later traded on the stock exchange. Their value changes according to the performance of that company. You can profit from a stock, by buying it cheap and selling it at a higher price. However, this is not the only way in which you can profit from the stock market. There are stocks that pay dividends, which can be a regular source of income for the shareholders. Check out the stock investing basics for more detailed information. Let us see how dividends work, in the following lines.
What are Stock Dividends?
The idea behind the introduction of dividends is that shareholders, being partial owners of a company, should get a share of the profits that a company makes. So dividends are essentially quanta of profit made by the company that are paid to shareholder. A company stocks may or may not pay dividends. It is totally up to the management.
The amount of dividends paid are directly proportional to the number of stocks that you own in a company. The dividends are paid per share. To be eligible for dividends, you need to register your stocks with the company. The dividend payout ratio for a stock provides you with an idea of the amount of dividends, which you can receive for any stock. More the ratio, better is the dividend payout.
How Do Stock Dividends Work for Investors?
The amount of dividends paid by a company are decided by the management board and a company announces it. Dividends may be paid every three months (quarterly), every six months or every year.
Since stocks keep getting sold and owners keep changing, companies decide on a record date, at which the dividend is paid to the person who is the current owner. As a rule, you must have bought a stock at least three days before the record date to be eligible for dividends that come as a part of it. Then there is the distribution date, that you need to note, when the dividends are paid. They are either paid in check or cash and deposited to your bank account. Some companies may provide you with more stocks instead of providing cash.
Not surprisingly, stocks that pay dividends are the most sought after ones as they constitute a regular source of income. So if you are looking to invest in some stocks that will provide you good returns in the long run, go for stocks with dividends.
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