As detailed above, profit is the difference between the income of the company and its expenditure during a particular period.

The company can choose to either divide its profits between its stockholders or they can choose to use the money for the further development of the company.

When a company decides to divide all or part of their profits to their shareholders, then the company is said to be “distributing dividends”.

There are 3 main types of publicly traded companies:

• Companies which invest their complete profit in the development activities of the company and does not distribute their dividends at all.
• Companies which invest most of their profit in the development activities, with only a small percentage of the dividends distributed to their shareholders.
• Companies which distribute a considerable portion of their profits.

For instance, if ABC Computers make a $6,000 profit in the year 2006, then they can use their money to purchase new computers or they can move to a spacious office, or they can distribute the profits to their shareholders as a dividend.
Shareholders need not necessarily lose if the company does not distribute the dividends.

If the profits are invested for expanding the company, and the investment wins, then the value of the shares of the company will increase, and the shareholders will also be able to get a better result.

In some cases, they tend to get even more than what they would have otherwise obtained from a dividend.

In the events of the stock split, the shareholders will not actually gain anything from the distribution of a dividend.

Stock prices will decrease after a dividend is distributed; and the new price plus the dividend will be equal to the original price of the stock.