Understanding Dividends and Stock Options

Stock is the shares in which ownership of a company is divided into several holders. In American English, all the stocks are collectively referred to as “stock” except for preferred stocks and common stocks. Each holder of stock actually represents fractional ownership in proportion to his/her ownership interest.


There are several types of stocks. Preferred stocks are issued by a company to an individual on behalf of the company, usually at a discount. These stocks come under the category of first priority. This means that the dividend rate is normally twice the rate of earnings per share. The second type of stocks are common stock. In common stock, ownership is not segregated into fractions; instead, all the shareholders are listed together and each of them gets a right to one fifth of the whole amount of shares (the company’s shares).

Dividends paid to shareholders are the source of income for a business. They come in two forms fixed and variable. A fixed dividend paid on a regular basis usually increases the market value of the stock and increases the company’s earnings per share. Similarly, a variable dividend is an interest rate payable to the shareholder, depending upon the performance of the company and market trends. One of the most important factors for calculating a company’s worth is its dividend policy.

It is important to understand the concept of dividends. A shareholder receives a fixed portion of a company’s profits after a specified limit. There are different types of dividends fixed and variable. A company may pay unrestricted dividends occasionally in its profits to its registered investors. Sometimes, it issues shares free of any restrictions.

There are several things that affect the profitability of a company. Among these are: the debt and capital structure of an organization, its products and services, the profitability of its product or service sales, and shareholder’s voting rights among other things. The type of ownership may also vary with respect to government regulation, company liquidity, company ownership structure, company’s credit ratings, and market competition among others. Different companies have different ways of determining the payment of dividends. Investors need to be aware of these things if they want to buy stocks of any company.

Dividends can also be a source of tax savings for investors. The tax obligation on dividends depends on the source of income of each shareholder. Usually, however, they are required to pay taxes only on their annual gross revenue, as opposed to dividends paid on shares which may be subject to another tax like the payroll tax. Hence, investors who receive dividends should consider this aspect carefully.