Final answer:
Stock dividends reassign company retained earnings to common stock, thus affecting the composition of shareholder's equity without changing the total amount. They increase common stock and reduce retained earnings. They represent a non-cash return to shareholders, different from dividends,
Step-by-step explanation:
When a company issues stock dividends, it distributes additional shares of its stock to its current shareholders proportionally to their existing holdings. This kind of dividend doesn't result in cash outflow, it simply reallocates part of the company's retained earnings to common stock. Therefore, stock dividends:
- Have no change on the total stockholder's equity.
- Increase common stock.
- Decrease retained earnings.
A share of stock represents a unit of ownership in a company and entitles the holder to a proportion of the profits, if the company decides to distribute them as dividends. Firms receive money from the sale of shares when they issue new shares or when they initially go public in an offering.
However, after these shares are on the open market, the firm does not receive any money from sales between investors; the transactions occur between shareholders themselves.
A dividend is a payout that a company makes to shareholders, which represents a portion of the company's profits. On the other hand, a capital gain is the profit from the sale of a stock or asset; the difference between the selling price and the purchase price.