Learn Stock Market Investing

For the past few months I have been ranting about the benefits, importance and advantages of stock market investing. I’ve also discussed the myths of stock market investing. Now let me tell you how exactly you can make money be investing in the stock market. I am sure you must be pretty excited now to start putting a substantial amount of your savings in the stock market.

There are four ways wherein you can make money through stock market investing. These are through Dividends, Capital appreciation and Stock rights. The fourth one which is the “Tender offer,” is not considered by most pundits as a way of making money in the stock market since this could very well fall within capital appreciation. But since the mechanics involved are quite different then I will include this as a fourth mode for the sake of discussion.  We will discuss these things in great details one by one.

1.) Dividends – Dividends refer to the profits given to stockholders. It is but logical that the reason why companies go into business is to make profits. Eventually part of the profits will end up being distributed to the owners of the company. When you buy shares of stocks in the stock market, you are a part owner of the company hence you get a share of the profits.

Types of dividends

There are three types of dividends, first you have Cash dividends, which is the most common type of dividend being distributed. Secondly you have the Stock dividends. If you are given stock dividends, this means that you have increased your interest or ownership in the company. The last type is Property dividend, which is rarely being given.

How dividends are computed

So how is the distribution of dividends computed? Cash dividend is computed by multiplying the number of shares held by the cash dividend rate declared. So for example if you hold 100 shares of TEL (Philippine Long Distance Telephone Company – PLDT) and the company declares a P 200.00 per share dividend, (As it did for the whole year of 2009) you get P 20,000.00 as dividends. (100 shares x P 200.00 per share). Stock dividend is computed very much the same way. Usually the company will declare a certain percentage as stock dividends, all you have to do is multiply that by the number of stocks you are holding and you get the number of stock dividends due to you.

Are companies required to declared dividends every year?

Another important question that is worth considering is do companies declare dividends every year? Are they required to do so? Actually the answer is a yes and a no. But the general rule is that it is up to the companies if they declare dividends or not. This is a business and operational strategy that is within their discretion. However there are several factors to consider.

First of all, take note that ideally dividends are to be declared from the “profits.” So logically if a company does not make any profit, than there is no point in declaring a dividend. This just makes business sense. Frankly the board of directors of a company that does otherwise is plainly stupid, incompetent or outright dishonest. Can you imagine taking out a loan just to declare dividends? (Sadly this is happening in some corporations) Secondly, most corporation laws like in the Philippines, require that companies declare dividends subject to certain rules. (The Corporation code of the Philippines states that Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock. Meaning they must declared dividends if this threshold is exceeded) However this is subject to certain exemptions. (See Sec. 43 of the Corporation code of the Philippines for more on this)

In actual practice, most companies listed in the stock exchange do declared dividends. This is to make them more “attractive” to investors. The question as to whether or not you should buy a company that always declares dividends or not, or whether you should buy a company with a higher dividend rate than others will be the subject of a different topic. (An interesting side note: Warren Buffett’s holding company Berkshire Hathaway has only declared  dividends once since  Warren Buffett took over in the 1960s !)

In conclusion, in some way dividends are a great way to make money in the stock market. Buying a stock that generates a lot of cash from its profits and has a high dividend rate every year certainly beats putting your money in time deposits! For example if you bought PLDT in 2008 for only P2, 000 per share and you had 100 shares, you have a P200,000.00 stake with PLDT. Since PLDT declared dividends of P 200 per share in 2008 you made P 20,000.00 in dividends. That’s about 10 % return in dividends alone! Certainly beats putting your money in time deposits! (Remember the Rule of 72?)

Watch out for part 2 of this exciting series on “How you can make money through stock market investing – Part 2.”

Hi ! my name is  Zigfred Diaz, Thanks for visiting my blog where you can learn stock market investing the Warren Buffett way and using other value investing methods ! Never miss a post from this blog. Subscribe to my full feeds for free. Click here to subscribe to D’Intelligent Investor by Email

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