Stock Market Income



Kinds of Stock Market Income

Two Taps One Spout

The two most common forms of stock market income are capital gains and dividends. Both full service or trading only brokers will need access to a bank account in your name which contains your trading capital. Funds for buying shares will be taken from this account and into it will be paid the proceeds of sales and dividends. The movement of money from the buying or selling of shares is a matter between you, your broker and the joint bank account only. Dividend payment may involve direct contact with the company or with its share registry company. The latter is an organization that many companies use as an intermediary between themselves and the shareholders. The registry company handles all matters with respect to the distribution of dividends. Whether dealings are with the company or the registry company the effect will be the same. Dividend payments will end up in your bank account, although this could be a different account from the one that the broker uses.

Capital Complications

Capital gains result from selling shares at a price higher than that at which they were bought. The higher price may occur as a result of good company performance or because of generally higher prices in the market owing to improved economic conditions. General economic conditions may relate just to the field in which a company does business or to national or world wide trends. Both of these situations may result from political events. Stock markets are always rife with rumours of all kinds and stock market income varies accordingly.

The share price of a particular company may result from a "take over" situation. This is where another firm (or other firms) decide that a company can be bought, totally, at a good price and that it will complement the "bidding" company's existing businesses. Any offer may not be for cash or cash alone. It could be a mixture of cash and shares in the bidding company. This may have implications for an individual shareholder's personal cash flow. The share price of the "target" company may rise or fall on the announcement of a formal take over bid being made.

Incoming

If the board of directors of the "target" company decide that it is good for shareholders that the bid should be accepted then they will so recommend this to a general meeting of the company. Directors have a legal duty to act in the shareholders' best interests. Usually if the bidding company acquires a large proportion of the shares of its target then the take over will be declared "total" and individual shareholders cannot then resist the bid and their shares will be compulsorily acquired by the bidder at the offered price.

There are many complexities that can happen with "take over" bids but the usual effect is that shareholders acquire a value in excess of the market price at the time of the bid. This may or may not be higher than any individual's original buying price. If it is lower then a shareholder will make no profit and no income will be derived. This is a less common form of stock market income and may be positive or negative insofar as capital is concerned.

Dividends Come to Those Who Wait

More Incoming

The point of being in business is to make a profit. A company distributes profits to shareholders, the owners of the company, by way of dividends. These are amounts paid regularly to shareholders in proportion to the number of shares each person holds. Clearly this depends on company performance. Thus stock market income can be derived by simply holding on to shares and waiting for dividends. Some companies are so big in fact and in their areas of business that they regularly achieve profits, can always pay dividends and are too large to be likely "take over" targets. Such firms are called "blue chip" companies because of their dividend reliability and secure position in their business area. Retirees in particular may like to invest in such companies because of the certainty of income and the safety, or low risk nature, of such an investment. Very little attention needs to be given to such investments in stock markets although a downside is that the original purchase price may be high.

There is more to earning income from the market than just buying shares, waiting and then selling them. The price of shares can rise and fall quickly and without warning. There is also complex trading in entities called "derivatives". Unless a retiree's expertise and experience extends to such matters then this trading will be beyond normal income earning activity. Earning stock market income can be as simple or complex as the individual trader prefers.

The Good, The Bad and ...

Trading on stock markets really is a case of "caveat emptor" - let the buyer beware.


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