What Can Stocks and Dividends Tell Us About a Company?
Original post by Wanda Thibodeaux of Demand Media
Stock is a way for companies to generate capital to use for business operations, projects and acquisitions. Dividends are payments made to shareholders of the company when the business earns a profit. Both stocks and dividends provide clues about how the public views the company, how stable the company is and how the company views investors. Insights into the company's overall financial health can also be gleaned by looking closely at a company's history of stock issuance and dividend payments.
The value of any stock is determined by market price. This means that the price of a stock depends on what people think about the company, and the value of a stock is whatever people are willing to pay at a given time. If a company's stock is very low in price, it implies that the public might not have a high regard for the company or its prospects. Sometimes, a low stock price is simply because investors aren't familiar with the company; but other times it is because investors have reservations about the company's operations, services or products. If a company's stock price is high, this indicates that the public views the company favorably.
When people view a company positively, it usually is because the company has a product, service or operational philosophy the public likes. This often translates into good sales and revenue. Thus, when stock prices are high, it is a good sign that the company is stable and performing well. In the same way, companies cannot provide a dividend to shareholders unless there is extra cash to spare. The payment of dividends therefore shows that the company has gained at least enough stability to earn a profit. If a stock pays dividends regularly, this indicates the company has been stable over time, not just in a single period. If a company offers a single, attractive dividend, however, it may be a signal the company needs more investors to maintain stability, explains Miranda Marquit of the Dividend Stocks Online website.
When a company offers stock, an exchange happens. You get partial ownership in the company and the company gets the funds you invest. Companies do not have to offer stock to get funds -- the company can go to banks and other lenders to get capital. The fact that they choose to offer stock says that, at least to some degree, the company wants the public involved in the business. In the same way, a company does not have to return its profits to shareholders, as Marquit points out. It could reinvest that money in any number of projects, but instead, it chooses to give the money to its investors.
Information and Size
Two forms of stock exist: publicly traded and privately traded. If a stock is publicly traded, the company is bound by U.S. Securities and Exchange Commission regulations to disclose financial information. Thus, if you buy a stock through a public stock exchange, you know you can get data about how the company is doing. Companies offering private stock are not bound by these regulations. Those who offer private stock tend to be smaller businesses, often family-owned ventures. This certainly doesn't mean the company is bad, but it does mean that the amount of business and resulting revenue is often more limited.
- Stock-Market-for-Beginners.com; What Determines Stock Prices?; 2009
- Dividend Stocks Online; What Does a Dividend Say About a Company?; Miranda Marquit; June 2011
About the Author
Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.
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