While investing in stocks is not overly complicated, there is a lot of information to digest. I’ve already done that for you, but I think it’s even more important to go over some basics in this article to see how it all works.
We will answer some of your most common questions about investing in stocks and shares but feel free to visit websites like https://www.sofi.com/investing-101-center/ to find further information.
First, let’s look at what are the basics of stock dividends.
After buying a stock, you’ll generally receive a royalty on the purchase price, plus a distribution (which I’ll talk about in just a moment) at a fixed rate for a period of years, normally 4 or 5 years.
The rate is set in statute and usually there is a cap on it. (You can read more about this in my article on Accounting for Dividends).
There are, of course, exceptions. For example, many large companies pay no dividends, but instead receive a distribution in the form of stock or cash.
How does it work when you buy stock in the public market?
When you buy stock in the public market, you have the opportunity to acquire shares at a discount.
If you can’t afford it, you can sell it to someone else who is more willing to pay for it.
In the US, there is a discount of 20% off the price on the day of the IPO (which is generally the first day of trading).
Many large stocks pay far more than 20%. However, often companies don’t pay in full until the second year. It’s always best to look for companies whose rates are considerably higher than the starting rate.
Companies tend to do tax losses if they exercise options at certain discount prices. So, for example, the SEC prohibits US companies from paying more than 20% for their IPO. (Related article: When to Avoid Paying Too Much for an IPO)
I often recommend buying on the first day, selling on the second day, and then buying back at the current market price.
But, do keep in mind that the sale price usually includes the exercise price of the options. So, you don’t want to do this if you have huge shares that you want to sell immediately. You should wait for those shares to sell back at the discount.
Most stocks will pay out a dividend every year.
It’s estimated that Americans receive an average of 9% in dividends. Some of these companies pay very little, while others pay more than you’d expect.
Usually, the public company will release its quarterly dividend information, while I usually recommend tracking the company’s Earnings per Share (EPS) to get the information on companies with negative earnings (unless the EPS is outstanding).
Dividends are generally taxed at the time of payment, with capital gains taxed at your regular tax rate.
You can see in my article Stock Investing Example that I’ve found that those dividends paid out during the current tax year will be taxed at just 20%.