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Shares may be purchased to generate regular income, in the form of dividends, alternatively shares may be bought for capital growth purposes, where you expect the value of the share to increase.
Dividends represent a share in the company’s profits. While companies keep most of their profits as retained earnings, that is money which can be used for future activities, a portion of their profits will be distributed to shareholders in the form of a dividend. The company’s board of directors usually decide when dividends will be paid out. It is commonplace that they are paid our quarterly, semi-annually and annually.
The dividend records for a company will be shown as follows. The following example is taken from the National Australia Bank (ASX: NAB).
Set prior to the record date (usually one day before). It is the trade date on which the dividend is not owed to a new buyer of the stock.
Must be registered as a shareholder prior to the record date to be eligible for the dividend.
The date in which the dividend is paid to eligible shareholders. You may elect for your dividends to be reinvested, alternatively they can be paid to your nominated bank account.
If you bought 500 shares of NAB prior to 1 May 2020, you will receive dividend income of $150 (500 x $0.3).
Focused on the increase in the value of the share. Growth stocks are purchased with the intention to sell the share at a higher price than the original purchase price. Companies focused on expansion will often prioritise growth by reinvesting earnings into product research and development, entering new markets and acquiring additional businesses.
It is important to factor in capital gains tax (CGT) when selling for a profit. You pay tax on the profit made from the sale of shares at your marginal tax rate. The current regulations state that if you have held the investment for longer than 12 months, you will only be taxed on half of the capital gain (CGT discount).
When deciding to sell your assets, it is important to factor in the rate you will be taxed at from the sale, and whether holding onto the asset to engage the CGT discount period is a viable option in the current economic climate.