Final answer:
A corporation may distribute profits to shareholders through dividends, with the amount paid being proportional to the number of shares owned. Additionally, investors can earn capital gains by selling shares at a higher price than they bought them. Dividends and capital gains are two main forms of financial returns for stock investors.
Step-by-step explanation:
Understanding Dividends and Rate of Return
When a corporation earns profits, it may choose to distribute a portion of those profits back to its shareholders in the form of dividends. The amount of dividend one receives is typically proportional to the number of shares they own. For example, if a company declares a dividend of $0.75 per share, a shareholder owning 85 shares would receive $63.75. Dividends provide a direct benefit to shareholders and can be a sign of a company's financial health and stability.
Moreover, investing in stocks can yield returns in two distinct ways: through dividends and capital gains. Dividends are payments made by a company to its shareholders out of its profits. On the other hand, capital gains occur when an investor sells their shares for more than the purchase price, as is the case when buying a stock at $45 and selling at $60, yielding a $15 gain per share.
Investors may focus on companies that offer dividends, like Coca-Cola or electric companies, as part of their long-term investment strategy. Such investment choices can lead to a predictable stream of income, usually sought after by individuals looking for steady financial returns over time.