What is Meant by Stocks? 

• A stock or an equity generally referrers to the security which represents that an individual who has purchased the stock or equity is a part of a company or Corporation because he or she owns a part of the Corporation through stocks. 

•  This means that the owner of the stock who owns a proportion of the company's asset an own profit is equal to how much the company stops their own. The units of the stock unknown as shares.  

• The ones who buy the share of the company are known as a shareholder of that particular company. This is because they get engaged for the purpose of investing their own money in that corporation or company.  

Dividends 

Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.  

Now since the shareholder is investing his or her money in a particular company, they may expect some kind of return. This return is known as a dividend. In other words, it can be said that dividend Is the distribution or dissemination of gains or profit that a company does, two its shareholders for the sake of the fact that they have been investing in the company which ultimately helped them for fundraising. Certain stocks do compulsory pay the dividend. Because the dividend is not a compulsory payment that a company needs to do to the shareholder.  

• Therefore, the stocks which pay a dividend are commonly known as dividend stocks. There can be times when the dividends are not distributed or the profits are not distributed among all the shareholders. In such a case, the profits or the dividend gets reinvested. This is known as the retained earnings of the Corporation or the company.   

• Therefore, if an individual wants some kind of return in the future from the investment that has been undertaken, they should purchase dividend-paying stocks.  

In other words, it can be said that the dividend is the reward that is being given to the shareholder of a company for investing their money into that company or Corporation or even into that venture. Also, it is important to keep in mind that dividends are made only for those companies that are publicly listed on the Stock Exchange. There are also certain ventures or companies which be high dividends to the shareholder of that particular company so that it becomes easier for them to raise funds for their company. Therefore, the dividend plays a very important role in determining that whether the stock will be listed on the Stock Exchange or commonly the stock market and more importantly what kind of people will buy those stocks as a part of their investment.   

• The board of directors of a company or Corporation can choose that how the dividend will be distributed to the shareholder of that particular company. The dividend can be given monthly, annually, semiannually. 

• There are certain companies which pay dividend quarterly as well.  

• The dividend also depends upon the factor that how large the company is. The larger and more established the company, the better dividend or it can be said that the company pays higher dividends because the profit earning capacity of that particular company is much more than other companies.  

• It can also be said that the companies which are just starting with their businesses may not offer a regular dividend. This is because the dividend is not a compulsory payment that has to be done to the shareholder by the company. Unlike an interest rate, which is given in terms of bonds or even for deposits kept in a bank, dividends are not necessarily will be given to the shareholder.  

• Because for a company that is just starting, the profit-owning capacity can fluctuate very rapidly. If in a year the company has not earned much profit, then the company can skip paying the dividend to the shareholder. Or, it can reinvest the profit instead of giving the dividend to the shareholder which is known as the retained earnings. This is done for the fact of expanding the business in the future.  

Key Takeaways 

• Being an investor, the individual needs to evaluate what kind of stock or equity he or she is willing to go for. One of the major ratios that can help the investor to evaluate this, is the dividend yield.  

• The dividend yield is the ratio which shows that how much does a company payout dividend each year to its shareholder concerning its stock price. The basic formula for calculating the dividend yield is to divide the dividend by the price. 

• The industries which do pay high dividend all high dividend yield are the companies which belong to the industry which people use from day-to-day life. 
•  It can be the industry in which the other companies that sell the basic materials that people use from day-to-day life, the oil and gas industry,  

• The bank and financial sector etc. Therefore, the investor needs to evaluate the dividend, the dividend yield, the stock, the payout ratio, which the investor is planning to invest in, to get a better return in the future.  

• Also, the period for which the investment is done is long-term or short-term. As because it is already seen that the dividend is the reward do the shareholder for the matter of fact that the investor is investing his or her hard-earned money into that particular company or Corporation. Therefore, the total return in terms of dividends should be worthy enough for the investment that has been done.  

Context and Applications 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for  

• Bachelor of Business Administration
• Bachelor of Commerce 
• Master of Commerce