Stocks represent ownership in a company and dividends are payments made to shareholders. Common shares carry voting rights while preferred shares guarantee a set dividend. Shareholders take on more risk but may earn more if the company prospers. Dividends are not guaranteed and companies may invest profits in areas other than shareholder distribution. Stocks and dividends are important for retirees, but investors should pay attention to tax implications.
Stocks and dividends are closely related; Shares are evidence of ownership in a company, such as a company or cooperative company, while dividends are payments made by the company to the owners of the shares or shareholders. Shares can be bought on a stock market if the company is public; Shares of private companies are also sometimes available, but not on any of the public stock markets. Buyers of shares of private companies may have to meet special requirements established by the company.
Basically, there are two different types of stock available to investors: common and preferred. Common shares are the most issued type of shares; many companies do not issue preferred stock at all. Common shares generally carry voting rights in the organization, generally on matters of importance to the company and also to members of the board of directors, although different classes of common shares, as defined by the company, may have different voting rights. vote.
Those who own preferred shares generally do not have voting rights, but are generally guaranteed a set dividend for the life of the company. When earnings are low or nonexistent, dividends to preferred stockholders are paid out of the company’s reserves. Dividends from common stockholders are not guaranteed, and there may be years when common stockholders do not receive any dividends. In very good years, however, common stock may earn higher dividends than preferred stock.
Shareholders take on more risk than the company’s bondholders and other creditors, and they may also earn more, because if the company prospers, the shares and dividends can increase in value. However, if the company does not do well and must be liquidated, the common shareholders often lose all their investments, because all the company’s debts are greater than the common shares, that is, they must be paid before the shareholders. Preferred shareholders generally share the same risk as common shareholders, although if money is left over after paying bondholders and other creditors, preferred shareholders will be paid first.
When companies calculate their profits, they also decide how to dispose of it. There are a number of areas that companies can invest their profits in, but one such area is the distribution of profits to shareholders, although most companies will not distribute all of their profits to shareholders. In its simplest form, this is done by the company deciding how much profit to distribute as dividends and then dividing it among all the shares that issue dividend payments to those shareholders.
Historically, stocks and dividends have been an important source of income for American retirees, whose pension plans and other retirement savings programs must find reliable investments. When they buy stocks, they generally restrict their purchases to established companies whose shares are listed on one of the major stock exchanges. People who invest in the stock market should pay special attention to their record keeping when selling shares because income from shares and dividends are treated differently for tax purposes. Inadvertently mixing them will generally result in a higher tax liability for the taxpayer.
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