Today, on the #TuesdayTerminology Financial Desk, we have
- Introduction
- Dividends
- Types & How They Work
- Shareholders - Types & Rights
- Conclusion
Companies issue dividends to their shareholders to share a portion of their profits. In simpler terms, we can think of it as a company’s “Thanksgiving” process.
Today, let’s dive deeper into the importance of stock market terms. These terms are used daily and should be part of every investor’s guidebook.
Excited? Keep on reading!
Dividends - Types & How They Work
There are many types of dividends, but the most important and popular ones are Interim & Final dividends.
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Interim dividend: An interim dividend is a payment made by a company to its shareholders before the annual general meeting (AGM) and the final financial statements. The dividend is paid before the announcement of the annual report.
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Final dividend: The final dividend is paid by a company to its shareholders after the annual financial results are declared. The final dividend is typically higher than the interim dividend.
You might have a question about how dividends are calculated and how you can receive them. Let’s understand:
How is Dividend Calculated?
It is technically called the dividend per share. Let’s say a company ABC decides to pay ₹50,00,000 of its profit as dividends for the outstanding shares of 5,00,000, so the dividend will be ₹50,00,000/5,00,000 = 10, so the company will pay ₹10/per share as dividends.
How will one get a Dividend?
One might think about buying a specific company’s stock after they announce the dividend, but companies are smarter than us. They announce the ex-date along with their dividend announcement.
Ex-date: The ex-date is the date before which you need to hold the company stock in order to be eligible to receive a dividend.
So, to be eligible to receive dividends, you need to hold the company stock before the ex-date.
But is it necessary for a listed company to issue a dividend? The answer is no. It is entirely up to the company and its board of directors to decide whether to issue a dividend or reinvest the profit back into the business.
Shareholders - Types & Rights
Shareholders are individuals, companies, or institutions that own shares in a company, making them partial owners and eligible for a share of the company’s profits.
There are mainly two types of shareholders:
Common shareholder: A person who owns a common share of a specific company, granting them voting rights and eligibility for dividends.
Preference shareholders: Also known as preferred stockholders, a person who owns preference shares receives a fixed dividend decided by the company. However, they do not have voting rights.
Here are a few brownie points
- Common shareholders have the right to vote for or against any company decision.
- Preference shareholders receive a fixed dividend.
- If the company announces liquidation before paying its debtors, preference shareholders must be paid before other creditors.
- Preference shareholders don’t get voting rights, but they can vote on resolutions that directly affect their rights as preference shareholders, such as changes to the terms of their shares.
So, what is your preference after reading the newsletter: like, comment, or both
Conclusion
Understanding basic financial terms is essential to becoming a confident investor or trader. Familiarising yourself with these financial terms will help you analyse and understand the market or market trends effectively.
Thank you for reading! Here’s another small challenge for you! Can you guess which company issued preference shares lately?
Tell us your answers in the comments below! The first person who gets it right will receive a special surprise from us!
Alice Blue does not intend to influence any trading decisions. The content provided is solely for educational purposes.