Chapter 1: What is a Security? - D. Types of Dividends

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.

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.

How to Pass The Series 99 Exam

E. Warrants
Related Articles
  1. Personal Finance

    Introduction To Financial Planning Organizations

    Organizations such as the FPA and NAPFA are striving to provide higher standards for the financial planning profession and greater protection for consumers through a combination of community ...
  2. Professionals

    Key Steps To Building A Great Financial Planning Practice

    Following the status quo will kill your financial practice. Find out the tips you need to follow to keep you a step or two ahead of the competition.
  3. Professionals

    A Day In The Life Of An Economist

    We've interviewed three economists with very different job descriptions to give you an idea of the many possibilities this career choice offers.
  4. Professionals

    The Best Training Programs For CFP Exams

    The competition to become a financial planner is hot, and growing hotter. Find out the best way to preparing to land the CFP designation.
  5. Professionals

    The Claritas Investment Certificate: A New Foundation-Level Program From The CFA Institute

    The Claritas Investment Certificate is likely to find growing acceptance as the new foundation-level education and ethics standard for the financial service sector internationally.
  6. Professionals

    CFP

    CFP Exam Guide
  7. Investing

    The 8 Best Business and Finance T.V. Shows

    With so many talking heads to choose from, which is the right show for your business and money matter needs? We review the best shows on now.
  8. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  9. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  10. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Open Architecture

    The option offered by an investment firm to let its clients invest ...
  3. Advanced Diploma In Insurance

    A qualification earned by insurance professionals and conferred ...
  4. Associate In Personal Insurance ...

    A designation earned by professionals looking for training in ...
  5. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  6. Associate In Reinsurance (ARe)

    A designation earned by insurance professionals looking for reinsurance ...
RELATED FAQS
  1. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
  2. What are the benefits of financial sampling?

    Financial sampling allows auditors to approximate the rate of error within financial statements. For accounting purposes, ... Read Full Answer >>
  3. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  4. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
  5. What are the benefits of hiring a Chartered Financial Analyst (CFA) to be my financial ...

    A Chartered Financial Analyst (CFA) has successfully passed rigorous coursework in the fields of economics, financial analysis, ... Read Full Answer >>
  6. What types of companies hire a chartered financial analyst (CFA)?

    The Chartered Financial Analyst, or CFA, program is a professional certification awarded by the CFA Institute. CFA candidates ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!