Why do shareholders get dividends from corporations?

[Mike]

I might sound dumb..but I still don't get the idea of shareholders investing in a company to get dividends. What does a shareholder's investment mean really? Does he pay money to a company or how does it work?

[lauren29michelle]

he buys stock in the company, so he technically is a prt owner of the company, so he gets the percentage of the total profit the company makes each year. he gets the percent equal to the percent of the company he owns.

[Chrissy C]

Shareholders
A corporation has a group of owners -- the shareholders. The owners elect a board of directors to make the company's major decisions. The owners of a corporation become owners by buying shares of stock in the corporation. The board of directors decides how many total shares there will be. For example, a company might have one million shares of stock. The company can either be privately held or publicly held. In a privately held company, the shares of stock are owned by a small number of people who probably all know one another. They buy and sell their shares amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange.

One of the big reasons why corporations exist is to create a structure for collecting lots of investment dollars in a business. Let's say that you would like to start your own airline. Most people cannot do this, because an airplane costs millions of dollars. An airline needs a whole fleet of planes and other equipment, plus it has to hire a lot of employees. A person who wants to start an airline will therefore form a corporation and sell stock in order to collect the money needed to get started.

A corporation is an easy way to gather large quantities of investment capital -- money from investors. When a corporation first sells stock to the public, it does so in an IPO (Initial Public Offering). The company might sell one million shares of stock at $20 a share to raise $20 million very quickly (that is a simplification -- the brokerage house in charge of the IPO will extract its fee from the $20 million, but let's ignore that here). The company then invests the $20 million in equipment and employees. The investors (the shareholders who bought the $20 million in stock) hope that with the equipment and employees, the company will make a profit and pay a dividend.

Another reason that corporations exist is to limit the liability of the owners to some extent. If the corporation gets sued, it is the corporation that pays the settlement. The corporation may go out of business, but that is the worst that can happen. If you are a sole proprietor who owns a restaurant and the restaurant gets sued, you are the one who is being sued. "You" and "the restaurant" are the same thing. If you lose the suit then you, personally, can lose everything you own in the process.

[8Curious8]

when a person invests in a company, he is letting the company use his money to carry out activities that would (supposedly) return profits. When the company does make profits, and have left over money after paying for all the costs or have put in the some of the profits to churn out additional profits, the left over distributed to the shareholders in the form of dividends.

So basically, you invest your $ so the company can use that to make more money for you. That's why you're getting dividends when you invest.