Shares and Dividends

Shares and Dividends:

When some individuals want to start a business, large sums of money or funds are required. These individuals may find it beyond their own financial capacity to invest such a large amount in a new venture. A public company is formed through the issue of shares to meet the financial requirements of the new business. A share is a unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the day-to-day activities of the business, but being a shareholder does entitle the possessor to a share in the distribution of profits in the form of dividends.

Shares are movable property.

A person who owns one or more shares is called a shareholder.

Value of a Share:

• The original value of a share is called its nominal value (abbreviated N.V.), face value, or printed value. The nominal value of a share always remains the same.
• The price of a share at any time is called its market value (abbreviated M.V.) or cash value. The market value of a share changes from time to time.
• If the market value of a share is the same as its nominal value, the share is called at par.
• If the market value of a share is more than its nominal value, the share is called at a premium or above par. If a share of $100 is selling at $135, then it is said to be selling at a premium of $35 or at $35 above par.
• If the market value of a share is less than its nominal value, the share is called at a discount or below par. If a share of $100 is selling at $88, then it is said to be selling at a discount of $12 or at $12 below par.

Dividend:

A dividend is a portion of corporate profits paid out to the shareholders. A company declares its profits at the end of the financial year. When a corporation earns a profit or surplus (after providing for depreciation), that money can be put to two uses; it can either be reinvested in the business in the form of retained earnings or it can be paid to the shareholders as a dividend.

Rate of Dividend: The dividend is declared as a percentage of the nominal value of a share irrespective of its market value. This percentage is called the rate of dividend.

Understanding the Terminology Used in Shares:

“15% $100 shares at $145” means that

• The face value of 1 share = $100
• The market value of 1 share = $145
• The dividend (profit) on 1 share = 15% of $100 = $15 p.a.
• The income on $145 is $15 for one year.
• The rate of return (or yield) p.a. = [(15/145) x 100]% = (300/29)%

Similarly, “12% $25 shares at a discount of $5” means that

• The face value of 1 share = $25
• The market value of 1 share = $25 – $5 = $20
• The dividend (profit) on 1 share = 12% of $25 = $[(12/100) x 25] p.a. = $3 p.a.
• The income on $20 is $3
• The rate of return (or yield) p.a. = [(3/20) x 100]% = 15%

Important Formulae:

(1) Investment:

(2) Income and Return:

(3) Number of shares:

Shares and Dividends Examples: