A company is owned by its shareholders, and shareholders receive the profits of a company in the form of stock dividends, which are usually distributed at regular intervals. A person receives his or her share of a company’s profit based on how many shares are owned and how profitable the company is. The distribution of profit as a result of common stock ownership is known as a common stock dividend. These dividends may be in the form of cash or additional stock.
Shares of stock in a company can be sold and resold every day, especially if the company is publicly traded. Owning stock is a way of profiting from an initial investment, and the risk is that dividends will not be paid or a company will not remain solvent, in which case a share of stock can be worthless. A share of stock in a company may result in a dividend as small as a few cents or as large as a few hundred dollars or more, depending on the stock and the company. Most people purchase common stock in large quantities rather than a share or two at a time.
Stock shares are typically divided into common stock and preferred stock. Preferred stock is purchased at a higher price, but it also comes with higher rewards, especially in the case of insolvency. If a company has to liquidate its assets, preferred stockholders will be refunded their investment before common stockholders. In addition, a dividend of preferred stock is usually greater than a common stock dividend. The owners of common stock usually have voting rights the same as the owners of preferred stock, and each share is considered one vote.
If a corporation decides to sell additional stock, a common stock dividend may be in the form of additional stock. The stockholder is given the additional stock in order to maintain their original percentage of investment. The stockholder then owns a greater number of physical shares of stock, but the percentage of the company that they own stays the same.
If a company is not making any money, there is no profit to be distributed. In this case, having stock in the company is not necessarily beneficial because there is no common stock dividend. In other cases, a company’s board of directors may choose to take the profits and invest them back into the company, such as through the purchase of a large piece of manufacturing equipment. Then there is no money to distribute back to the stockholders, and as a result, there is no common stock dividend.
A common stock dividend is somewhat regulated. If a company is approaching insolvency, it cannot simply liquidate all of its cash in the form of dividends. This could be considered fraudulent behavior, especially in the eyes of creditors. The people and organizations to which the company owes money must have some rights to the cash on hand before liquidation can take place.