If you own equities, the value of your holdings increases when the shares you own become worth more than what you paid for them. But that’s not the only way you can come out on top by owning equities.
For example, companies pay dividends out of their own profits and into the pockets of their shareholders. These periodic payments aren’t guaranteed, but when available, they can provide major benefits. As an investor, you can either reinvest your dividends or take them as income.
A capital gain is the difference between the price at which you bought shares and the price for which you sell them. There are both long- and short-term capital gains, each with their own tax rate.
Dividends are taxed like long-term capital gains, as long as they’re “qualified dividends.”
If you own equities, your broker or fund company should provide you with IRS Form 1099-DIV that breaks down your dividends and capital gains for the tax year.
Owners of preferred stock get more access to earnings and assets than owners of “common stock” can claim. Preferred shareholders are more likely to get regular dividend payments (usually at a fixed rate) and they get paid before the owners of common shares. The catch is that, because dividend rates for preferred shareholders are generally fixed, the owners of preferred stock won’t see their dividends jump as the company becomes more profitable.
In the event that the company goes bankrupt or is liquidated, preferred shareholders have dibs on assets and earnings before common shareholders. In the hierarchy of who gets to take a company’s assets if it folds, bondholders are at the top, since they’ve loaned money to the company. Preferred shareholders are next, followed by common shareholders.
Say you get a job offer, complete with salary, health insurance, a 401(k) and equity. What exactly does “equity” mean in that case? It means that you either have an ownership share in your new company now, or you will have when your equity “vests” – in other words, when it becomes official by virtue of the fact that you’re still with the company. In some cases, your equity is given to you outright. At other times, it consists of the option to buy stock at a preferential price.
Equity alone does not a great job offer make, however. Unless your company goes public or is sold (these are known as “exit events”), your equity won’t pad your bank account. Plus, since your salary is already tied to the fate of the company, the more company stock you own the more financial eggs you’re putting in that one basket.
Made with Mobirise - Visit site