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As discussed, shares comprise a certain portion of an organization. Several profit-making companies listed on the share market share their profits among shareholders, which is the primary objective of paying dividends. Companies distribute a small component of their profits as dividends to the investors. This becomes an important source of earnings for investors who stay involved in the share market for a longer period of time.
Because dividends are a minor portion of company profits that are returned to the investors, they provide additional incentive for individuals to hold on to their stocks even if the company is not growing at high rates. This is an important share market basic, which all investors must remember.
Companies utilize dividends to share the annual profits directly with the shareholders. Generally, it is paid as cash; the organization pays a small percentage of the earned profits to every shareholder. Sometimes, this profit share could be in the form of offering additional stocks to the investors.
Companies can either pay fixed rate, referred to as preferred dividends, or they can pay variable dividends based on the earnings, known as common dividends.
Investors should remember one thing about share market investment — companies are not obliged to make these payments by any regulatory guidelines. However, preferred shareholders are more likely to receive these pay-outs, unless the companies are going through exceptional financial difficulties.
Investors need to bear in mind that bigger dividends do not always mean better. It is generally seen that companies paying high dividends are unable to sustain these rates in the longer period. Thorough research and exercising caution while choosing dividend-paying companies will help sustain periodic returns on investments in the share market.
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