Shares And Dividends
Theory
A share is a tiny piece of ownership in a company. Shareholders can profit two ways: dividends (a yearly slice of profits) and capital gains (selling for more than the buy price). Two key ratios — dividend yield and P/E ratio — describe how the share is priced, and brokerage is the fee paid on every trade.
A share (or stock) is a tiny piece of ownership in a company. The market price is the current price per share — it moves up and down with demand.
A dividend is a slice of company profits paid to shareholders, usually once or twice a year. Dividend per share is the dollar amount each share receives per year. Earnings per share (EPS) is total company profit divided by the number of shares — distinct from dividend per share, since profits can be reinvested.
Brokerage is the fee a broker charges per trade, paid on both purchase and sale. It might be a flat dollar amount or a percentage of the trade value. Capital gain (or loss) is the difference between sell and buy price, multiplied by the number of shares.
Dividend yield (as a percentage of the market price):
Price-to-earnings (P/E) ratio:
Total cost of buying shares (include brokerage):
Capital gain (or loss) when selling:
Total return on the investment:
Key terms at a glance:
| Term | Meaning |
|---|---|
| Market price | Current price per share |
| Dividend per share | Dollars paid per share per year |
| EPS | Company profit ÷ total shares |
| Brokerage | Broker's fee per trade |
| Capital gain | Sell price − buy price |
How to work through a share problem
- Identify what's asked: yield, P/E, total cost, capital gain, or total return.
- For yield, divide dividend per share by market price and multiply by \(100\).
- For P/E, divide market price by annual EPS.
- For total cost, multiply shares by price, then add brokerage (flat or percentage).
- For capital gain, take (sell − buy) × shares.
- For total return, add all dividends received to the capital gain.
Yield is dividend over price, times \(100\%\).
| \(\text{yield}\) | \(=\) | \(\dfrac{1.50}{25} \times 100\%\) |
| \(\text{yield}\) | \(=\) | \(6\%\) |
The dividend yield is \(\textbf{6\%}\).
Find trade value, then add the brokerage (\(0.5\%\) of the trade).
| \(\text{trade}\) | \(=\) | \(400 \times 18.50 = 7{,}400\) |
| \(\text{broker}\) | \(=\) | \(7{,}400 \times 0.005 = 37\) |
| \(\text{total}\) | \(=\) | \(7{,}400 + 37 = \$7{,}437\) |
The total cost is \(\textbf{\$7{,}437}\).
P/E is market price divided by EPS.
| \(\text{P/E}\) | \(=\) | \(\dfrac{36}{2.40}\) |
| \(\text{P/E}\) | \(=\) | \(15\) |
The P/E ratio is \(\textbf{15}\) — the price represents \(15\) years of current annual earnings.
Add up dividends received plus capital gain.
| \(\text{divs}\) | \(=\) | \(500 \times 0.50 \times 3 = 750\) |
| \(\text{gain}\) | \(=\) | \((10 - 8) \times 500 = 1{,}000\) |
| \(\text{total}\) | \(=\) | \(750 + 1{,}000 = \$1{,}750\) |
Sam's total return is \(\textbf{\$1{,}750}\).
Common pitfalls
Frequently asked questions
What is a share?
A small unit of ownership in a company. Shareholders profit from dividends and from selling for more than they paid.
What is a dividend?
A payment a company makes to shareholders, usually once or twice a year, as their share of company profits.
How do you calculate dividend yield?
Divide the annual dividend per share by the current market price, then multiply by \(100\) for a percentage.
What is the price-to-earnings (P/E) ratio?
The market price divided by annual earnings per share. It shows how many years of current earnings the price represents.
What is brokerage?
The fee a broker charges to trade shares for you. It can be flat or a percentage of the trade value, and is paid on both the buy and the sell.
What is a capital gain?
Profit from selling shares for more than the buy price: \((\text{sell} - \text{buy}) \times \text{shares}\). A negative result is a capital loss.
Practice Questions
10 questions available.
Practice Questions