What Are Stock Dividends & Stock Splits?

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  • 0:04 Some Basics on Corporations
  • 0:55 Going Public With a…
  • 1:28 Ownership, Dividends &…
  • 2:47 Stock Splits
  • 4:24 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define corporation, shareholders, and stock. You'll also learn the benefits of stock ownership: dividends, capital gains, voting privileges, and stock splits. We'll also discuss the disadvantages of stock ownership.

Some Basics on Corporations

Betty Joe's Donuts have been voted the best donut shop in the state for the last ten years. Betty Joe and her two sisters have run the business as partners for more than twenty years. Today they're meeting with a big-time investor, Robert, who wants to expand their business nationally. He's willing to invest $5 million.

Robert tells the ladies that before he will consider investing, they'll need to incorporate. A corporation is a legal entity owned by shareholders, which of course would be Betty and her sisters. A shareholder is an investor who owns a percentage of a corporation. Robert goes on to say, in order to raise additional capital for the expansion, the corporation would need to go public, meaning other investors could become shareholders too.

For the rest of this lesson, we'll explore the financial benefits of shareholders: owning stock, receiving dividends, and stock splits.

Going Public With a Corporation

IPO, an acronym for initial public offering, and going public are used synonymously. In other words, Betty Joe's Donuts will go public and offer stock, a percentage share of the corporation, to the public. Companies go public hoping a demand exists for their stock to bring cash into the organization. When investors purchase stock they become shareholders, and the company receives cash for expansion and growth initiatives, operating expenses, and advertising budget or research and development projects. Now let's examine the benefits of owning stock.

Ownership, Dividends, & Capital Gains

Of course, shareholders expect something in return for purchasing stock in Betty Joe's Donuts. The first financial benefit is dividends. Dividends are a percentage of the corporation's profits paid to the shareholder, typically quarterly or annually. Investors are paid dividends based on the number of shares they own. If the company pays $.25 per share and you own 1,000 shares, you'll receive $250.

Additionally, shareholders purchase stock hoping for capital gains. For example, if an investor purchases stock for $10 per share, then sells the stock for $15 per share, the investor's capital gains are $5 (or $15 - $10) per share.

Voting privileges are another benefit of stock ownership. Typically, the shareholder receives one vote for each stock he or she owns. Shareholders are able to vote on various issues, such as mergers, board of directors, and executive salaries. It's important to note, voting does not require the shareholder's presence. They may vote by proxy, a mailable voting form.

The disadvantages may sometimes overshadow the benefits. For example, stock prices are volatile and can cause a capital loss, or a drop below the initial purchase price. Additionally, the company may make a profit but may not pay dividends and may decide to reinvest the profits instead.

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