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Question

What are the benefits of share ownership?

Answer

There are two ways you can benefit from owning shares. The first way is through the growth of the company.    Say, for example, ABC Plc earns revenue of £300,000 in one year.  After deducting its costs, it has £100,000 left – its profit.  It then reinvests this money in the business, perhaps by investing in better technology, which enables it to cut costs and, therefore, make a bigger profit the following year.  If it can continue to improve its profits, demand for its shares will grow and the share price will rise.  This type of company, known as a growth stock, is popular with investors who do not need income from their investments.  Many companies also pay a dividend.  Say, for example, XYZ Plc earns revenue of £800,000.  After deducting its costs and reinvesting in the business it has £80,000 left over.  It decides to return this money to shareholders by paying a dividend.  If the company has 100,000 shareholders, each share will get a dividend of 80p per share.  So, if you own 100 shares, your total dividend will be £80 (minus dividend tax).  Shares that pay dividends are generally known as ‘Income’ stocks.  Companies can return money to shareholders in other ways too such as buying back their shares.  This increases the value of those shares still in circulation.

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