Have you ever stumbled on the terms “dividends” and “share trading” but you don’t know what they mean? A dividend is an amount of money rewarded or paid in a regular manner (usually quarterly) by a corporation/company to its shareholders. Seems knotty and complex? Not at all, if you have an idea what they are. But if you are a newbie in share trading, below you will find all the things you have to know concerning the exciting sphere of share trading.
The Mechanism of Dividends
- Supposing that you want to open a fast food restaurant business and you don’t have the necessary financial resources or capital to wrap it up. So what you do is to begin raising some funds from eager and enthusiastic investors. You then grant those investors some shares in return for the funds you’ve got for your restaurant business.
- Later, you generate a lot of money as your fast food restaurant business becomes a success. You then reinvest the profit you get from your business by opening other restaurants. The process goes on for a number of years, and, in due course, your business arrives at a point in which your major competitors are your own fast food restaurants: this is commonly known as market saturation.
- At this stage, convinced that you will persist in generating a lot of earnings from your fast food restaurants, you decide to begin paying a part of your profits to investors. This “profit payout” towards your investors is in actual fact what dividends really mean.
Depending on the performance of a business, dividends can differ or change. Normally, corporations or companies usually begin to award dividends to their shareholders the time when the company’s progress begins to slow down. Furthermore, dividend rates can differ, depending on the type of industry the company is involved. Generally, telecommunications and real estate investments trusts (REITs) shell out a much elevated dividends. On the other hand, internet and biotech companies pay less or most often none at all.
You might be asking, “is investing in shares similar to laying a bet?” If you want to find more information about dividends, read our beginner’s guide to investing in shares
Procedure to Invest in Shares
Are you planning to invest in shares and you just don’t know how to figure it out? Well, investing in shares is not at all complicated as you would have imagined. Here you can find all the information you need in order to acquire a comprehensive grasp of the share investment field.
Definition of Shares
A share certificate, commonly known as share, is a legal document that attests ownership of a defined company. When you have some shares in a company, this means that you are a “shareholder.” In simple words, a shareholder owns a part of a company and, thus, is entitled to whatever profit the company makes, regardless if you, a shareholder, is employed or not in the company. Clear at this point, right?
Ways to Generate Earnings from Share Investment
The two common ways investors can generate some profits from investing in shares are the following:
- Realise Profit from Dividends: As the company generates some profit, the company will then hand out a portion of that profit to its shareholders. This distribution of profit is usually known as “dividend”.
- Realise Profit from Capital gains: As the company develops and becomes a success, the price of its shares may augment. If you have invested at a lower purchase price, you can generate profits by selling the shares at the current elevated price. The earnings you make by “buying low and selling high” is called capital gain.
Is Investing in Share a Typical Form of Laying a Bet?
The answer is, “absolutely not,” because no value is involved in laying a bet. Gambling is different from share investment. You just lose money in laying a bet or in gambling. Nevertheless, by purchasing shares, you are investing in a real business, which can have a positive effect on the performance of the entire economy. Take not that real risks are involved in share trading and you could end up losing some cash. It is a smart move to look for professional advice before you set off to a share trading adventure.
Ready to Embark on Share Trading?
Before you commence with buying and selling shares, provide yourself with a share trading account. Read our short guide on how to begin trading shares in 4 simple steps.
Want the best financial deals in town delivered to your inbox once a month? Sign up for iMoney’s Monthly Round-Up today!