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Shares

What are dividends?

Dividends are the portion of corporate profits that are allocated to shareholders.

When a company makes a profit, the management chooses whether to put this back into the business or pay it to the shareholders as dividends. Most stable companies choose to strike a balance by reinvesting a percentage and paying the rest as a dividend, which may take the form of cash or stock.

Dividends can compensate for a share price that isn’t moving much, giving shareholders an income instead. Companies that are considered ‘high growth’ do not usually offer dividends as they reinvest profits to sustain their growth by expanding the business. The reward for shareholders in this case is a higher expected share price.

When are dividends paid out?

Every time a company pays a dividend, it must be officially declared by the board of directors. Companies that pay out cash dividends will generally issue them half-yearly, although they may occasionally decide to pay a one-off special dividend.

There are a few important dates to remember:

The dividend declaration date
This is the day on which the board of directors announces that a dividend will be paid.

The record date
This is when the company officially determines who their qualifying shareholders are ('holders of record').

The ex-dividend date
Stock purchases can take some time to clear. To avoid any complications about ownership when the dividend is paid, the record date is preceded by a cut-off point (normally by two or three days). At this point you must own shares in the company in order to be listed as a shareholder and receive a dividend.

This cut-off is known as the ex-dividend date. As a listed owner, once the ex-dividend date has passed you can sell the share and still receive the dividend.

The payment date
This is the day the dividend is paid out to shareholders. A long time can elapse between the ex-dividend date and the payment date.

Corporate actions

A corporate action occurs when a publicly-traded company initiates a change to the business that will affect its shareholders, such as a merger, acquisition or share split. Any corporate action will normally need to be agreed by the company’s board of directors and authorised by its shareholders.

A corporate action may have substantial implications for the company’s finances, including its share price and performance.

Derivatives

Share derivatives are contracts which derive their value from the price of an underlying share – that is to say, a share that’s available to trade on a stock exchange in the traditional way.

Derivative contracts are what we offer at IG. Put simply, Contracts for Difference (CFDs) are an agreement to exchange the difference in value of a share (or other instrument) between the time your position is opened and the time it is closed.

So, when buying a share derivative you are paying to own a contract on the underlying share, rather than the share itself. There are many different types of derivative contracts, the most common of which are CFDs, futures and options.