Understanding Dividends

About Dividends

If you’ve ever been curious about stock investing, you may have asked yourself in the past: What are dividends? You might know that the term is related to money and it’s typically something good, but there are a lot of facets to dividends that can help you make smarter financial decisions.

To understand dividends, you need to understand a little about stock market trading first. The stock market is a market where people buy and sell shares of ownership in public companies like Apple, Walmart, Bank of America, and many more. The most obvious way to make money in the stock market is through price appreciation.

Understanding Dividends
In this strategy, you buy shares at a certain price, such as 10 shares at $1 per share. If the price appreciates to $2 per share, your 10 shares are now worth twice as much, and you end up with a total of $20 instead of $10. As great as this sounds, it’s not easy for most people to figure out which stocks are going to go up in price. Fortunately, there’s another way to make money in stocks: dividends.

So, what are dividends, exactly? Put simply, dividends are payments given to shareholders in a company. Those payments come from profits. If you bought 10 shares of a dividend-paying stock at $1 per share, and the company pays a ten cent dividend, then you earned a dollar in dividends from holding its stock. Assuming you still like the company, you can opt to reinvest your dividends into additional shares. In the previous example, your new dollar could buy you one more share, bringing your updated total to 11 shares.

Many investors like to include different kinds of stocks in their portfolio. Instead of relying on stocks to appreciate, or on stocks to pay dividends, they get some of each. That way, if their growth stocks go down, the losses are offset by reliable income from their dividend stocks. This diversification is a balancing act, and it requires some experience to find the best portfolio for your particular situation.

It’s also worth noting that dividends are highly valued by people in retirement. That’s because those people are no longer working, and it’s very risky to put their money into anything that has more than a slight chance of going down in value. With dividend stocks, the company is usually mature and not about to go up or down much. Instead, it’s likely to funnel a large portion of its profits into dividends to shareholders.

These are just some basics about bonds. To ensure financial stability or prosperity, it’s a good idea to learn more about stock market trading and dividends.