Shares and Dividends

A company that needs money to run divides its total capital into many small equal parts called shares, and sells them to the public. Each person who buys shares becomes a shareholder, which means a part-owner of the company. The value printed on the share when the company issues it is the nominal value or face value (also called par value), for example Rs 100, Rs 50, Rs 25 or Rs 10. This nominal value is fixed and never changes.

Once shares are sold, people buy and sell them among themselves in the share market, and the price keeps changing. This trading price is the market value. If the market value is more than the nominal value the share is said to be at a premium (above par); if it is less it is at a discount (below par); if it is equal it is at par. A Rs 100 share quoted at Rs 120 is at a premium of Rs 20; quoted at Rs 80 it is at a discount of Rs 20.

When the company earns a profit it keeps some and shares the rest among the shareholders. This share of profit is the dividend, and it is always given as a percentage of the nominal value, never of the market value. So a 12 percent dividend on a Rs 100 share pays Rs 12 per share each year, whether you paid Rs 80 or Rs 150 for it. Your total annual income is simply the number of shares multiplied by the dividend on one share.

The dividend rate is calculated on the nominal value, but you actually paid the market value, so the dividend rate alone does not tell you how good your investment is. The return percentage (or yield) compares your yearly income with the money you really invested: return percent equals income divided by amount invested, times 100. Buying at a discount raises your return; buying at a premium lowers it. This single number lets you compare two different shares fairly.