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Understanding Equity Investing and Dividends

Aug 17, 2007
Equity investing refers to an investor or perhaps a fund buying a share of stock and then holding it. This is done with the expectation that the stock will provide some form of income whether it is from dividends or capital gain due to rising stock value. Equity investing can also mean partial ownership of a private company not listed on the stock exchange. In some cases the companies are fresh startups. This is called venture capitalism and is a substantially higher risk then investing in an established company with an established track record.

Most equities that an individual investor holds are in the form of mutual funds as part of a pool of investors. Mutual funds are professionally managed funds that allow a diverse portfolio to minimize risk. To identify a good stock for the purpose of holding, there are two methods used. One is Technical analysis and fundamental analysis is the other.

Technical analysis is a study of the price history of a share compared to the price history of the market as a whole. Fundamental analysis involves the study of all financial data to forecast trends in relation to stock market activity. Once a good stock has been determined, they are usually held in order to receive a dividend or the value from capitol gains. The additional appeal of a mutual fund is in the fact that as more of an investor's money is put into the fund, the more the investment will be affected by market increases.

Dividends are payments that a company will make to shareholders when the company is making a profit. Normally a board of directors on a quarterly basis decides the dividends. Even if a company posts a loss for a quarter, dividends can still be issued based on previous earnings. Since shareholders are part owners of a company their primary interest is that the business provide a profit.

Dividends can be issued by paying out cash to shareholders based on the number of shares they own. Stock and property dividends are also other ways a profit can be paid out to share holders. For a stock dividend additional shares are issued to owners based on a predetermined percentage. Property dividends are paid out by issuing assets from either the issuing or the subsidiary corporation.

Some companies avoid paying out cash dividends in order to reinvest the money into the company. This allows companies to expand, increase budgets and invest in other ventures. In some cases this can serve as a protection for shareholders since they could possible be taxed double because of income tax laws.

A common way for investors to deal with cash dividends is to enroll in a dividend reinvestment plan. This allows the holder to continuously buy small amounts of stock without a commission. Increasing the ownership in a company increases equity.

There are certain tax ramifications due to capital gains; a professional tax specialist should be consulted in order to properly prepare for the taxes that may be necessary due to an increase in capital assets. IRS tax laws are very clear when it comes to defining an asset. Basically anything a person owns can be considered a capital asset, by selling capital assets at a profit, that profit is considered taxable.
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