The world of investing calls to mind images of men in suits rushing to work on Wall Street. Many people are intimidated by the thought of investing in the stock market or in any other type of stock-related financial instrument because they're not quite sure what they're doing and they don't feel comfortable trusting anyone else with their hard-earned money. They hear about stocks and dividends and profits, and aren't sure what any of that means. But a little knowledge can be a powerful thing, and with the definition of a few terms, you might grow a little confidence in your ability to successfully play the stock market.
A dividend is a payment made by a company to its stockholders. If you invest in a company and the company makes a profit, then you, as a shareholder, are entitled to a share of that profit. This is the way in which people are able to make vast amounts of money by predicting the rise and fall of various stocks. The way that these dividends are paid out depends on the type of company you've invested in, the company's policies, and the laws that govern the taxation of this type of profit.
For a joint stock company, dividends are allocated per share. This means that, for every share you have purchased with the company, you will receive a set amount. If you bought two shares, then you will receive double the amount. These payments are usually made on a fixed schedule, and many people choose to automatically put those payments towards buying more stock in the company, increasing their investment in the company and their net profit if the value of the stock continues to rise. This requires little attention other than deciding when to sell or stop purchasing more shares. Investors like to find high dividend stocks and put their money where they will get the most return.
For a cooperative company, on the other hand, dividends are allocated based on your activity in the company. This means that, if you invest more, you'll receive more because you're making a bigger contribution and are, therefore, more actively involved in the company's success. Your share of the profits increases the more you invest. Payouts from cooperatives are often perceived as pre-tax income by the IRS, which will likely play a significant role in your decisions regarding when and how you cash out on your dividend. Understanding what a dividend is can help to make you a little more comfortable with the idea of investing, now that you know the name of the thing you're looking for: a dividend.