You you purchase one or more shares in a stock company, you become one of the owners of that company. The capital stock of a company constitutes the owner’s equity stake.
Today, shares can be bought and sold online through online brokers and you don’t need to have a big bankroll to invest in shares. Before you sign up with a broker, make sure you understand the costs associated with using this specific broker. To put it simply: how much will you pay this broker company for their services? If you are planning to do a lot of small transactions, picking a broker that will charge you a large fixed fee / minimum free for each transaction can quickly erode your bankroll.
Shares in public companies
Public companies have their shares listed on a stock exchange, such as the New York Stock Exchange (NYSE) or London Stock Exchange (LSE). This means that they are obliged to follow the rules of the specific exchange, and these rules are often considerably stricter than the basic legal requirements for stock companies. Also, many jurisdictions place greater legal demands on public companies as compared to non-public companies.
Trading shares anywhere else than on an exchange is known as over-the-counter trading. Both public and non-public stock companies can be traded over the counter (OTC). There are many trading platforms and trading forums available that aren’t classified as exchanges and all trading that takes place on them are therefore by definition OTC trading.
What are dividend payments?
Buying a share now and selling it for a higher price later isn’t the only way to profit from owning shares. As a shareholder, you can also profit from dividend payments.
Dividend payments are payments made by the stock company to the shareholders. It is usually well-established and profitable stock companies that carry out dividend payments. For such companies, it is a way of giving the shareholders (the company’s owners) a part of the profit.
The board of the company is not allowed to carry out a dividend payment unless it has been approved by the shareholders at a shareholder meeting.
In many jurisdictions, dividends are treated more favorably from a tax point of view than most other types of profits from your investments. There are for instance jurisdictions were only a part of the dividend payment will count as taxable income. Depending on the jurisdiction, dividend paying shares may be a powerful tool for tax planning, especially if one needs to avoid being bumped up into a new and more costly tax bracket.
Common shares vs special shares
When dividend payments are made, all shares within the same class of shares must receive the same amount of money (or whatever other asset that constitutes the dividend payment). Discriminating between different classes of shares is permitted in most jurisdictions.
Shares that are entitled to dividend payment before all other classes of shares are known as shares of preferred stock. A company can for instance decide to only pay dividends to preference shares, or pay a larger dividend to preference shares than to to common shares. In some jurisdictions, preference shares will typically come with no voting rights. They are attractive to investors who wish to receive dividend payments but doesn’t want to attend shareholder meetings.
There are also classes of shares that will not receive any dividend payments. In some jurisdictions, stock companies may issue a special class of shares (in addition to common shares) that have a higher vote strength than common shares but have no right to dividend payments.
I want to receive dividends!
There is no way of guaranteeing that the shares you buy will result in you receiving any dividends down the line, but there are certain steps you can take to increase your chances of getting dividends. When choosing between various stock companies that you have deemed suitable, look at their history and pick companies with a consistent track record of paying dividends to the shareholders.
Typically, this will be well-establishes and highly profitable companies. Some sectors are more likely to contain good dividend-paying companies, e.g. basic materials, oil & gas, bank & financial, health care & pharmaceuticals, utilities and real estate.
Newly formed companies are not likely to pay dividends, since they are either not profitable yet or using their profits for expansion.