Why shares and dividends matter
Ever wondered how a company decides who gets a slice of its profit? That’s the world of shares and dividends – and it’s not as scary as it sounds.
💡 In Simple Words: A share is like a tiny piece of a cake that belongs to you. When the cake makes money, the baker (the company) may give you a little extra slice called a dividend.
What is a share?
A share (also called a stock) is a unit of ownership in a company. Think of a pizza cut into many slices – each slice is a share. If you own one slice, you own a part of the whole pizza.
Types of shares you’ll meet in ICSE
- Equity share: The most common type. Gives you voting rights and a claim on profits.
- Preference share: Pays a fixed dividend before equity shares get anything. No voting rights usually.
- Debenture: Not a share, but a loan you give to the company. You get interest, not dividends.
Understanding dividend
A dividend is the amount of profit a company distributes to its shareholders. It’s like a thank‑you gift for investing. The company first decides what percentage of its profit will be shared – this is called the dividend rate.
How to calculate dividend per share
Follow these four steps:
- Find the total profit that is declared as dividend.
- Decide the dividend rate (percentage of profit to be given).
- Calculate the total dividend amount = profit × dividend rate.
- Divide the total dividend by the number of shares issued to get dividend per share.
Worked example: Company XYZ
Let’s pretend Company XYZ earned Rs. 2,00,000 profit this year. The board decides to give 10% of profit as dividend.
- Step 1: Total profit = Rs. 2,00,000
- Step 2: Dividend rate = 10% (or 0.10)
- Step 3: Total dividend = 2,00,000 × 0.10 = Rs. 20,000
- Step 4: XYZ has issued 5,000 equity shares. Dividend per share = 20,000 ÷ 5,000 = Rs. 4 per share
So each shareholder gets Rs. 4 for every share they hold.
Quick summary
| Concept | Key Point |
|---|---|
| Share | Unit of ownership, like a pizza slice |
| Dividend | Profit given to shareholders, expressed per share |
| Dividend rate | Percentage of profit set aside for dividend |
| Dividend per share | Total dividend ÷ number of shares |
📝 Likely Exam Questions
- Define a share and give one example of a type of share.
Answer: A share is a unit of ownership in a company. Example: Equity share. - A company has a profit of Rs. 1,50,000 and declares a dividend at 8%. It has issued 3,000 shares. Find the dividend per share.
Answer: Total dividend = 1,50,000 × 0.08 = Rs. 12,000. Dividend per share = 12,000 ÷ 3,000 = Rs. 4. - Explain why preference shareholders receive dividend before equity shareholders.
Answer: Preference shares have a fixed dividend right; the company must pay them first as per the terms of issue. - If a company’s dividend rate is increased from 5% to 7%, what happens to the dividend per share, assuming profit and number of shares stay the same?
Answer: Dividend per share rises because the total dividend amount grows (profit × higher rate).