Ever wondered how buying a tiny piece of a company can earn you money without doing any work? That’s the magic of shares and dividends.
A share is a slice of a company’s ownership. When the company makes profit, it can give a part of that profit to you – that’s called a dividend. Think of it like sharing pizza and getting a bite of the toppings.
What are Shares?
A share is a unit of ownership in a business. If a company issues 1,000 shares and you own 10, you own 1% of the company. Owning shares means you have a right to a share of the profits and, sometimes, a say in big decisions.
Types of Shares
There are two main kinds you’ll meet in your exams:
| Type | Key Feature | Typical Dividend |
|---|---|---|
| Equity (or Ordinary) Share | Gives voting rights and profit share | Variable – depends on profit |
| Preference Share | Fixed dividend, usually no voting rights | Fixed – set amount each year |
Think of equity shares like a regular pizza slice – you can ask for extra toppings (vote). Preference shares are like a pre‑packed snack: you know exactly what you’ll get, but you can’t change the flavor.
Understanding Dividends
A dividend is the portion of profit a company gives to its shareholders. It’s like a thank‑you gift for investing. Companies can pay dividends in cash (money) or in more shares (called a scrip dividend).
How Dividend is Calculated
The basic formula is:
Dividend per Share = (Total Dividend Paid ÷ Number of Shares)
Let’s break it down with an example.
Example 1: ABC Ltd. earned a profit of ₹2,00,000. The board decides to pay 40% of profit as dividend. The company has 10,000 shares.
- Find total dividend: 40% of ₹2,00,000 = 0.40 × 2,00,000 = ₹80,000.
- Divide by number of shares: ₹80,000 ÷ 10,000 = ₹8 per share.
So each shareholder gets ₹8 for every share they own.
Example 2 (Preference Share): XYZ Ltd. issued 5,000 preference shares with a 5% fixed dividend on a face value of ₹100 each.
- Fixed dividend per share = 5% of ₹100 = ₹5.
- Total dividend = ₹5 × 5,000 = ₹25,000.
Even if the company makes a loss, preference shareholders still get their ₹5 each (unless the company is insolvent).
Key Formulas to Remember
- Dividend Yield = (Dividend per Share ÷ Market Price per Share) × 100. It shows how much return you get relative to the share price.
- Profit Sharing Ratio = (Number of Shares Owned ÷ Total Shares) × 100. Gives your percentage ownership.
- Total Dividend Paid = Dividend per Share × Number of Shares.
Common Mistakes and How to Avoid Them
1. Mixing up face value and market price. Face value is the original cost of a share when it’s issued, while market price is what you actually pay now.
2. Ignoring the 40% profit rule. The board may decide any percentage, but many textbook problems stick to 40% for simplicity.
3. Forgetting to convert percentages to decimals. 5% becomes 0.05 when you multiply.
Quick Revision Checklist
- Define share, equity share, preference share.
- Know the dividend formula and when to use it.
- Be able to calculate dividend yield.
- Remember that preference dividends are fixed.
- Practice converting percentages.
📝 Likely Exam Questions
- Question: A company has 8,000 equity shares. It declares a total dividend of ₹48,000. Find the dividend per share and the dividend yield if the market price is ₹150 per share.
Answer: Dividend per share = ₹48,000 ÷ 8,000 = ₹6. Dividend yield = (₹6 ÷ ₹150) × 100 = 4%. - Question: XYZ Ltd. issued 2,500 preference shares of ₹100 each with a 6% dividend. Calculate the total amount paid as dividend.
Answer: Fixed dividend per share = 6% of ₹100 = ₹6. Total dividend = ₹6 × 2,500 = ₹15,000. - Question: If a shareholder owns 150 out of 15,000 total shares, what is his profit‑sharing ratio?
Answer: Ratio = (150 ÷ 15,000) × 100 = 1%. - Question: A firm’s profit is ₹3,00,000. The board decides to pay 35% as dividend. There are 12,000 shares. Find the dividend per share.
Answer: Total dividend = 0.35 × 3,00,000 = ₹1,05,000. Dividend per share = ₹1,05,000 ÷ 12,000 = ₹8.75. - Question: Explain why preference shareholders receive dividend even when the company records a loss.
Answer: Preference shares carry a fixed dividend right. The company must honour it before any dividend is given to equity shareholders, unless it is insolvent.