What are dividends and how do they work? Table of Contents
- What are Dividends?
- Why are long positions credited less than short positions are debited?
- Where can I view upcoming dividends?
- Where can I view past dividends?
- What is a dividend and what types are there?
- How do dividends affect stocks?
- What is the dividend yield?
- Why do companies pay dividends?
- How and when are dividends collected?
- What are the taxes on dividends?
- Is it better to invest in dividends or in trading?
In the financial world, there are a considerable number of options to be able to obtain benefits, but it is necessary to know in depth each one of the tools to be able to take advantage of them.
Investing in stocks, as can be done after creating a free account on FXCM, is one of the most popular alternatives, as, in addition to allowing us to speculate, it can also pay us dividends.
There are different types, and they will be charged more or less depending on the performance and the policies of each company.
Next, you will learn what exactly these dividends are, why companies choose and how and when they are collected.
What are Dividends?
Dividends may impact the number of overnight costs you pay or earn on your Share CFD position.
When a dividend is paid on a stock, the value of the stock will drop.
Short positions will be positively impacted by the drop in Price, while long positions are negatively impacted.
Dividends are applied on the Eve of the Ex-Dividend date.
For example, if the Ex-Dividend Date was February 3rd.
All positions held at the end of February 2nd would be subject to a dividend adjustment.
To avoid paying dividends, you can close your position before 5 PM EST and the adjustment would not apply.
Why are long positions credited less than short positions are debited?
The differential may be both a result of an FXCM Markup and Withholdings.
For example for US shares, as per Section 871 of the US tax code.
A tax applies on dividend adjustments to traders of equity derivatives of US stocks.
In accordance with FXCM’s obligation under this US tax regulation, 30% of all credited Dividend adjustments are withheld and passed on by FXCM to the IRS.
Where can you view upcoming dividends?
The daily dividend amount can be viewed from the simple dealing rates window in the Trading Station platform in the columns marked “Div S” (For sell/short positions) or “Div B” (For buy/long positions).
Where can you view past dividends?
Dividends paid or earned on a specific position can be found in the account statement.
Account statements can be accessed via the “Report” button on the Trading Station platform (Desktop, Web, or Mobile) or by entering www.myfxcm.com using the login for the account you want to run the report on.
From the menu, go to My Info->Reports.
Fill out each field as desired, and then click on the blue Get Report button.
What is a dividend and what types are there?
When a subject invests in a company by buying a certain number of shares, it is possible that the company will obtain benefits, and therefore that the investor receives part of them. The income that the individual receives is called a dividend, and it is generally proportional to the number of shares previously acquired. To understand it better, suppose that a company called X has obtained 200,000 euros of annual profits and that it has decided to reinvest 100,000 euros in the company to continue growing, either by opening new stores or investing in more ideas. The rest will be distributed among all the shareholders of your company in the form of dividends.
Consequently, if company X allocates 100,000 euros to its shareholders and one of them owns 10% of the company’s shares, it will receive a total of 10,000 euros. However, it must be taken into account that there are different types of dividends and that depending on the policy of each company, one or the other will be received. In the above case, company X paid a cash dividend, so the investor earned a profit that can be used outside the company. This is the majority option, but it is also possible that the company decides to pay the dividend in the form of shares. If this is the case, shares may be offered from treasury shares or from a capital increase.
When a company distributes shares of its treasury stock, it means that the company bought its own shares in the past and now distributes them in the form of dividends. In this way, the investor has the possibility of gaining weight in the company, since with more shares his percentage of participation in the company would increase. On the contrary, if the dividend is given in the form of capital increase shares, the shareholder would stay the same or lose money in the short term. This fact is due to the creation of the new shares since these will cause the original percentage of participation to decrease. Therefore, by obtaining more shares as a dividend, it is most likely that the investor will have the percentage of the principle again and even have to pay some tax for it.
On the other hand, there is the so-called special or extraordinary dividend, which is usually distributed in cash when a company obtains an unusual income. Therefore, the amount to be distributed is generally greater than that of a common dividend. Usually, this extra income is distributed when the company has sold an asset that has generated considerable profits. At that time, the company’s board of directors and its board have to choose whether to reinvest that profit in the company or distribute it in the form of dividends to incentivize shareholders.
How do dividends affect stocks?
When a company chooses to distribute its profits or part of them through dividends, its capital falls significantly. That is, if company X had 200,000 euros in profit on Monday and the next day it distributes half, you will notice how your shares will lose value until they recover again. For this reason, it is difficult for stocks to reach a very high value in the near future. Still, dividends have positive effects in other ways.
On the one hand, a good history of dividends makes a company inspire confidence, especially if it has been increasing this income little by little and now has a solid position in the market. As a result, even if a company’s share price drops after dividends are paid out, new shareholders may join in waiting to collect the next dividends. Normally, these types of investors are those who are looking for a regular and secure income. Also, those who already own part of the company could invest more money in it.
So if a company does the opposite and does not honor the promised dividend, it will disappoint investors and have the opposite effect. If you finally decide not to pay the dividend, your capital will not decrease immediately, but it will worsen your prestige and the shareholders will not trust you. Therefore, they could even sell their shares. So, it is essential for a company to make a more or less accurate calculation of the dividend that it will be able to offer to its shareholders and to comply with it.
What is the dividend yield?
Dividend yield, often called yield by its name in English ( Dividend yield ), is a tool that allows the shareholder to know how much they could earn with the dividends of a company. The mathematical formula is as follows:
Dividend yield = Dividend per share / Share price × 100
In this formula, the dividend per share is the figure that a company expects to pay as a dividend in the near future, while the price of the share is the current price of the company on the stock market. For example, if a company expects to pay a 1 euro dividend and has traded its share at 5 euros, then its dividend yield would be 20% since 1/5 = 0.2 x 100 = 20%. All the companies present in the stock market expose this data daily, so that those who are interested in investing, can observe which are the companies that interest them the most.
To know if a yield is good or not, it is important to know what the interest rate of a deposit is in the country in question. If this is close to the figure, you will be more or less fine. However, do not forget that the dividend yield does not describe the company completely, but is one more piece of information to take into account, along with others such as the history of dividends.
Why do companies pay dividends?
To be able to answer why companies pay dividends, it must be taken into account that these types of companies are usually consolidated in the market and do not offer expectations of future growth. An example of this could be McDonald’s, which as can be seen on FXCM, is currently trading on the stock exchange. Although it is a stable company of immense global success, it will generally not offer remarkable benefits if it speculates on its shares, as they will not rise in price significantly without a special event.
Therefore, in order to encourage the purchase of their shares, companies of this type distribute dividends. In this way, the investor can ensure income with said income and add it to what he obtains when he speculates on the shares. The opposite happens if we consider how growing companies such as Tesla operate, which, although it already has a certain firmness in the market, is continuously expanding. Therefore, instead of distributing dividends, what you do is reinvest your profits to continue expanding your business and thus raise the price of your shares. In this case, the investor would obtain his profits by speculating with them.
For all the above, it is not a surprise that most of the companies in the Spanish stock market that pay dividends are companies with decades of experience that are known to a large part of the population. Here are some of the ones that currently offer the highest dividend yield.
How and when are dividends collected?
The dividend calendar has several dates, which are determined by the Board of Directors. The first important moment is the announcement date of the dividend when the Board mentions how much the dividend will be. Then, on the registration date, the company verifies which investors meet the necessary requirements to collect them. For its part, the ex-dividend or reinvestment date is key for payment, since investors must have the shares at this time if they want to collect dividends. Finally, on the payment date, the corresponding income of the dividends is made.
If you decide to invest in FXCM, whether in an ETF (Exchange-Traded Fund), stock, or index that provides a dividend, it can be collected through the platform easily. If you have a sell position, the dividend will be subtracted from the available balance, while if the position is a buy position, the income will be added to the balance. In the case of having a CFD (Contract for Difference) position, the dividend will be reflected in the balance corresponding to the reinvestment date. When a position guaranteed with a real asset is available, the disbursement is received on the payment date.
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What are the taxes on dividends?
The taxes that must be paid when obtaining dividends depend on each country, as there is no universal regulation. Even so, the most common is having to pay a certain amount. It is essential to be up-to-date with the data for each territory, as they may vary annually. Currently, in accordance with article 25.1.a) of Personal Income Tax Law 35/2006, of November 28, in Spain, dividends are income from movable capital.
For this reason, these must appear in the income statement, since between 19% and 23% of the amount received will be paid. It is important not to be confused with the regulations prior to the 2015 reform, which allowed users to charge up to 1,500 euros without having to pay taxes. For now, whatever the amount, taxes must be paid. Likewise, in the income statement, the possible profits that have been obtained by having sold some stocks and those whose origin is the dividends.
Is it better to invest in dividends or in trading?
Now that we know the definition of dividend and all that it entails, we can reflect on whether it is better to invest in it or in trading. In this case, it could be said that the situation is relative since it will depend on the investor’s objectives. Trading, which is roughly buying and selling assets for profit, requires considerable training, while the world of dividends is partially easier to understand. Both can offer remarkable benefits, but trading has the ability to deliver high returns with smaller investments.
Likewise, it must be borne in mind that trading is riskier, and therefore requires a more studied technique. Investing in dividends is more geared towards those who are not looking to earn large amounts, but rather want a constant passive income. For this reason, it is recommended to diversify the portfolio so that there is a better chance of success and therefore stability. At FXCM, you will find options whether you prefer to start your dividend investment strategy or if you want to start investing in trading through your mobile phone.
In short, the financial world has multiple alternatives to earn profits, and both investments in trading and dividends are excellent options. The latter, which are generally collected in cash, requires that concepts such as yield be studied, and can be obtained from such relevant companies as Telefónica or Endesa. They are a remarkable choice for those investors who want to have constant and practically safe profits, so do not hesitate to take a look at the companies and ask if they may be a good option for you.
Please click "Introduction of FXCM", if you want to know the details and the company information of FXCM.
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Comment by Diletta
March 26, 2024
Awesome bonuses, good leverage. A few hiccups, but support rocks!