If you’re a beginner who is planning to invest in the stock market, you may not be aware of many of the concepts like dividends. However, there are many ways through which you can make money off the stock market, and dividend is one of them. Continue reading to find out all about dividends, how it works, and the different types of dividends that companies usually give out.
Companies that generate profits through their business generally tend to use them to further their business agenda by purchasing assets, clearing off debts, or satisfying their working capital requirements.
However, some companies distribute the profits that they generate to their shareholders. The share of profits that the shareholders of a company receive are what is termed a dividend. Therefore, to be eligible to receive dividends from a company, you would have to become its shareholder by purchasing the entity’s shares.
Generally, companies that wish to distribute dividends often do so as a percentage of the face value of their shares. So, for instance, let’s say that a company declares a dividend of 30%, and its face value is Rs. 1. This would mean that for every share owned by a shareholder, they would get a dividend of Rs. 0.30.
Now that you’ve understood what a dividend in the stock market is, let’s take a look at the different kinds of dividends that companies usually give out.
A cash dividend is when a company chooses to distribute its profits to its shareholders in the form of cash. The example that you saw above in the previous section is a good representation of a cash dividend.
Stock dividends are when companies offer more shares to their shareholders instead of cash. These dividends can be issued by both profitable and loss-making entities. In the case of stock dividends, shareholders get more stock in the company based on the number of units they hold. For instance, if a company declares a stock dividend in the ratio of 1:2, it essentially means that for every two shares held by the shareholder, they would receive 1 share as a dividend.
Dividends are also classified based on when they’re issued to the shareholders. Interim dividends and final dividends are two of the most common types.
An interim dividend is when a company issues dividends to its shareholders before the annual financial statements are prepared, i.e., during the middle of a financial year.
On the contrary, a final dividend is when a company issues dividends after the annual financial statements are prepared, i.e., after a financial year ends.
With this, hope you’ve now understood what a dividend in the stock market is. That said, keep in mind that not all companies issue dividends to their shareholders. Generally, large-cap companies or entities with mature businesses and stable financials are the ones who issue dividends regularly. On the other hand, growing companies, mid-cap, and small-cap companies generally don’t partake in dividend distribution.
Now, before you go ahead and start investing in dividend-paying companies, first make sure to open a Demat account. Without one, you cannot invest in the Indian stock market. So visit Motilal Oswal today to open a Demat account for free within minutes. Once that is done, you can proceed to invest in dividend stocks, growth stocks, or even upcoming IPOs.