Cash

A cash dividend is the most common form of dividend, and it is one that the test focuses on. A corporation will send out a cash payment in the form of a check directly to the stockholders. For those stockholders who have their stock held in the name of the brokerage firm, a check will be sent to the brokerage firm and the money will be credited to the investor’s account. Securities held in the name of the brokerage firm are said to be held in “street name.” To determine the amount that an investor will receive, simply multiply the amount of the dividend to be paid by the number of shares.

Need Help Passing Your Series 99 Exam?

Example:

JPF pays a $.10 dividend to shareholders. An investor who owns 1,000 shares of JPF will receive $100:

1,000 shares x $.10 = $100.

Stock

A corporation that wants to reward its shareholders, but also wants to conserve cash for other business purposes, may elect to pay a stock dividend to their shareholders. With a stock dividend, each investor will receive an additional number of shares based on the number of shares that they own. The market price of the stock will decline after the stock dividend has been distributed to reflect that there are now more shares outstanding, but the total market value of the company will remain the same.

Example:

If HRT pays a 5% stock dividend to its shareholders, an investor with 500 shares will receive an additional 25 shares. This is determined by multiplying the number of shares owned by the amount of the dividend to be paid.

500 x 5% = 25

Property/Product

A corporation may send out to its shareholders samples of its products or portions of its property. This is the least likely way in which a corporation would pay a dividend, but it is a permissible dividend distribution.

Rights

A right is issued to existing shareholders by a corporation that wants to sell additional common shares to raise new capital. All common stockholders have a preemptive right to maintain the proportional ownership in the company. If the corporation were allowed to sell additional shares to the general public, the existing shareholders interest in the company would be diluted. As a result, any new offering of additional common shares first must be made to the existing shareholders. Common shareholders will receive a notice of their right to purchase the new shares. They will be offered the opportunity to purchase the new shares at a price that is below the current market value of the stock. This is known as the subscription price. The shareholder will have the right to purchase the new shares for 45 days.

Possible Outcomes for a Right

Exercised

The shareholder may elect to purchase the additional shares. This is known as exercising the right. The investor sends in the rights as well as a check for the total purchase price to the rights agent and the additional shares are issued to the investor.

Sold

The investor may not want to purchase the additional shares and may elect to sell the rights to another investor. The investor who purchases the right will then have the opportunity to purchase the stock at the subscription price for the duration of the original 45-day period.

Expire

The right to purchase the additional shares will expire at the end of the 45-day period if no one has elected to purchase the shares. A right will only expire if the stock’s market price has fallen below the subscription price of the right. While market price of the stock is fluctuating during the 45-day period, the subscription price of the right remains fixed.

Terms

The particular terms of the rights will be printed on the right certificate and each share of outstanding stock will be issued one right. The terms will include: the subscription price, the final date for exercising the rights, the number of rights required to purchase additional shares, and the date that the new shares will be issued.

Standby Underwriting

A corporation may retain a brokerage firm to purchase any shares that existing shareholders do not purchase. This is known as a standby underwriter. The brokerage firm will purchase the shares that were not bought by the existing shareholders and resell them to the investing public.



E. Warrants

Related Articles
  1. Investing

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
  2. Managing Wealth

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  3. Investing

    Explaining Rights Offering

    A rights offering is an offer by a company to its existing shareholders of the right to buy additional shares in proportion to the number they already own.
  4. Investing

    Stock Rights Issue

    Rights are offers that allow existing stockholders to buy additional shares at a predetermined price, for a set time period. Usually, the number of shares the investor can purchase are in proportion ...
  5. Managing Wealth

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  6. Investing

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  7. Investing

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  8. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  9. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  10. Retirement

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center