Stocks and dividends are critical terms for securities investors to know, especially those with interests in the stock market. A stock is investor ownership in a company. Investors purchase this ownership stake in shares. The shares change in value as their trading prices change on the stock market, where they are listed with other stocks. Some stocks employ dividends, which are distribution payments to shareholders made from a company's earnings.
Stocks' Use of Dividends
Stocks offer dividends as a way of sharing their earnings with the shareholders who have a proportional ownership in the company. However, stocks that provide dividends also use them as an incentive to investors, giving them a reason to consider purchasing shares. This helps spur growth in the stocks, increasing the share price and making the stocks more valuable.
Dividends represent a way for shareholders of stocks to receive regular income from their investment. Stocks with dividends typically make regular payments to shareholders. Most stocks make the payments on a quarterly basis. Aside from dividends, stocks do not provide regular payments to shareholders, who may see the value of their shares increase but who do not receive non-dividend income from the stocks until they sell their shares. The regular payment of dividends ensures that shareholders receive concrete value from their shares while they are holding them. This gives shareholders a reason to hold onto their shares for extended periods of time.
Stocks Without Dividends
Not all stocks provide regular dividends to their shareholders. Some elect to reinvest all of their earnings rather than share them with shareholders. This especially is true of emerging companies that are engaged in rapid business growth. These companies use their earnings to fuel expansion. Shareholders tend to expect this arrangement with growing companies and often to encourage it. That is because they want to see their investment grow, and the lack of dividend is countered by the company's growth and the possible accompanying growth in the stock's share price.
Stock Price and Dividends
Purchasing shares in a stock that historically has paid dividends does not guarantee dividends will continue unabated. The relative growth or decrease in a stock's share price has a corresponding impact on the dividend that a company pays. A struggling stock has reduced earnings and tends to provide a low dividend payment to investors, if it pays one at all. A soaring stock, meanwhile, is more likely to pay dividends to share its financial good fortunes with the shareholders who helped push the stock price skyward.
- stock market image by Sydney Alvares from Fotolia.com