Why care about shares and dividends?
Ever wondered how a company can turn a tiny piece of paper into real money for you? That’s the magic of shares and dividends – and it’s not just for adults. Let’s crack it together.
💡 In Simple Words: A share is a tiny slice of a company. When the company earns profit, it can give you a slice of that profit called a dividend. Think of it like sharing pizza: the more slices you own, the bigger your bite.
What exactly is a share?
A share (also called a stock) is a unit of ownership in a company. If a company decides to split itself into 1,000 equal parts, each part is a share. Owning a share means you own a tiny piece of the company’s assets and earnings.
Key features of a share
- Nominal value: The face‑value printed on the share certificate, like ₹10 per share.
- Market price: What people actually pay for the share on the stock market – can be higher or lower than nominal value.
- Voting right: Usually, each share gives you one vote in company decisions.
Understanding dividends
A dividend is the portion of profit a company decides to give back to its shareholders. Companies don’t have to pay dividends; they may reinvest the profit instead. When they do, the amount per share is called dividend per share (DPS).
How dividend works – an everyday analogy
Imagine a lemonade stand that makes ₹500 profit in a day. The owner promises to share the profit with the kids who helped. If there are 5 kids (each holding a share), each kid gets ₹100 – that’s the dividend per share.
How to calculate dividend per share
The formula is straightforward:
DPS = Total dividend declared ÷ Number of shares
Let’s break it down step by step.
Worked example
Company X declares a total dividend of ₹12,000. It has issued 3,000 shares.
- Write down the total dividend: ₹12,000.
- Count the shares: 3,000.
- Apply the formula: DPS = 12,000 ÷ 3,000 = ₹4 per share.
So every shareholder receives ₹4 for each share they own.
Other useful calculations
| Concept | Formula | What it tells you |
|---|---|---|
| Dividend Yield | (Dividend per Share ÷ Market Price) × 100% | How much return you get relative to the share’s market price. |
| Earnings per Share (EPS) | Net Profit ÷ Number of Shares | Profit earned for each share – useful to compare companies. |
| Profit Distribution Ratio | (Total Dividend ÷ Net Profit) × 100% | What percent of profit is handed out as dividend. |
Quick Revision: Key Points
- A share = one unit of ownership in a company.
- Dividend = profit shared with shareholders; DPS = total dividend ÷ shares.
- Dividend Yield shows return compared to market price.
- EPS helps gauge a company’s profitability per share.
- Always check the nominal value, market price and total shares before calculating.
📝 Likely Exam Questions
- Question: A company declares a total dividend of ₹18,000. It has 4,500 shares outstanding. Find the dividend per share.
Answer: DPS = 18,000 ÷ 4,500 = ₹4 per share. - Question: If the market price of a share is ₹80 and the dividend per share is ₹5, calculate the dividend yield.
Answer: Dividend Yield = (5 ÷ 80) × 100% = 6.25%. - Question: A firm’s net profit is ₹90,000 and it has issued 3,000 shares. What is the earnings per share?
Answer: EPS = 90,000 ÷ 3,000 = ₹30 per share. - Question: Explain in a few lines why a company might choose not to pay dividends.
Answer: The company may retain earnings to fund expansion, pay off debts, or invest in new projects, which could increase its future value. - Question: Define ‘profit distribution ratio’ and give its formula.
Answer: It shows the percentage of profit paid as dividend. Formula: (Total Dividend ÷ Net Profit) × 100%.