Shareholders are paid in two main ways: Dividends and Capital Appreciation.
Dividends:
Dividends are payments made by a corporation to its shareholders. These either come in the form of cash or additional shares of stock. These payments represent a portion of the company's profits and are typically distributed on a regular basis (e.g., quarterly). The decision to pay dividends and the amount is determined by the company's board of directors.
Capital Appreciation:
Capital Appreciation is the increase in the value of an asset or investment over time. For stocks, this means a rise in the stock price, which benefits shareholders who can sell their shares for more than they paid for them.
Important Information Regarding Dividends and Profitable Companies:
The lecturer of the Coursera course emphasized that not all profitable companies pay dividends. Some companies, especially ones in growth phases, might reinvest their profits back into the business instead of distributing them as dividends. This reinvestment can lead to business expansion, the development of new products, or other strategies aimed at increasing the company’s value. However, investing your money into larger companies will almost certainly pay dividends.
Reinvestment in a Business:
This can lead to capital appreciation in a few ways:
Expansion: Investing in new markets or increasing production can lead to higher sales and profits
Innovation: Funding research and development can result in new products or improved services that are more appealing to customers
Efficiency: Upgrading technology or optimizing operations can reduce costs and increase profitability
Market Position: Strengthening the company’s competitive position can lead to a larger market share and higher revenues
When a company successfully reinvests its profits to grow and enhance its business, the value of the company increases, leading to an increase in its stock price and providing capital appreciation to shareholders.
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