Why Shares and Dividends matter for you
Ever wondered how a company’s profit can end up in your pocket? That’s the magic of shares and dividends – and it’s easier than you think.
💡 In Simple Words: A share is a tiny piece of a company that you can own. When the company earns profit, it may give you a part of that profit called a dividend. Think of it like getting a slice of pizza after the whole pizza is baked.
What is a Share?
A share (also called a stock) represents one unit of ownership in a company. If you own 10 shares of XYZ Ltd., you own 10 tiny slices of that business. The total number of slices the company decides to cut up is called its authorized share capital – basically the maximum number of shares the company is allowed to issue.
Key terms you’ll meet
- Authorized share capital: The ceiling of shares a company may create.
- Issued share capital: The actual number of shares the company has sold to investors.
- Paid‑up capital: The amount of money shareholders have actually paid for those shares.
Understanding Share Capital
Imagine a bakery that wants to raise money to open a new outlet. It decides to cut its business into 1,000 equal slices, each worth ₹100. If it sells 600 slices, the issued share capital is 600 × ₹100 = ₹60,000. When the buyers hand over the cash, that amount becomes the paid‑up capital.
What is a Dividend?
A dividend is a share of the company’s profit paid to its shareholders. Not every profit becomes a dividend – the board of directors decides how much to keep for growth and how much to hand out.
Dividends can be paid in two ways:
- Cash dividend: Money straight into your bank.
- Stock dividend: Extra shares instead of cash.
How to Calculate Dividend per Share
The formula is simple:
Dividend per Share (DPS) = Total Dividend Declared ÷ Number of Shares Outstanding
“Shares Outstanding” means the shares that are actually held by investors (issued minus any that the company has bought back).
Worked Example 1 – Cash Dividend
ABC Ltd. declares a total cash dividend of ₹12,000. It has 3,000 shares outstanding. What is the DPS?
Plug into the formula:
DPS = 12,000 ÷ 3,000 = ₹4 per share.
So if you own 50 shares, you’ll receive 50 × ₹4 = ₹200.
Worked Example 2 – Stock Dividend
XYZ Ltd. decides to give a 5% stock dividend. It has 2,000 shares outstanding. How many extra shares will a shareholder with 100 shares receive?
Extra shares = 5% of 100 = 5 shares. After the dividend, the shareholder will hold 105 shares.
Quick Comparison Table
| Aspect | Cash Dividend | Stock Dividend |
|---|---|---|
| Form of payment | Money | Additional shares |
| Effect on share price | Usually drops by dividend amount | Share count rises, price per share may fall |
| Tax treatment (India) | Taxable as income | No immediate tax, taxed when sold |
How a Dividend Moves from Profit to Your Pocket
📝 Likely Exam Questions
- Q1. A company has a paid‑up capital of ₹50,000 represented by 5,000 shares. It declares a total cash dividend of ₹10,000. Find the dividend per share and the amount received by a shareholder who owns 120 shares.
Answer: DPS = 10,000 ÷ 5,000 = ₹2. Shareholder gets 120 × ₹2 = ₹240. - Q2. Explain the difference between authorized share capital and paid‑up capital with a short example.
Answer: Authorized capital is the maximum shares a company may issue; paid‑up capital is the money actually received for the shares that have been issued. Example: A firm may have an authorized capital of 10,000 shares at ₹100 each (₹1,000,000). It issues 4,000 shares and receives ₹400,000 – that ₹400,000 is the paid‑up capital. - Q3. XYZ Ltd. gives a 10% stock dividend. If you hold 250 shares, how many shares will you have after the dividend?
Answer: Extra shares = 10% of 250 = 25. Total after dividend = 250 + 25 = 275 shares. - Q4. A company’s profit after tax is ₹80,000. It retains ₹50,000 for expansion and declares the rest as dividend. If there are 2,000 shares outstanding, calculate the dividend per share.
Answer: Dividend declared = 80,000 – 50,000 = ₹30,000. DPS = 30,000 ÷ 2,000 = ₹15 per share.