From the course: Finance and Accounting Tips

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Dividends and stock buybacks

Dividends and stock buybacks

From the course: Finance and Accounting Tips

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Dividends and stock buybacks

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- A corporation is a business owned by many different owners, called shareholders. The documents that prove their ownership are called shares, or shares of stock. Successful corporations generate surplus cash that they don't need for expansion or to repay bank loans. These surplus cash flows are sometimes called free cash flows. Who owns that surplus cash? Well, the shareholders do. It's wrong to think of that surplus cash as belonging to the corporation. The corporation is simply the legal ownership structure used by the people that really own the business. The shareholders. Because the corporation doesn't need this surplus cash to proceed with its planned expansion efforts, the cash should be returned to the owners, the shareholders to use in whatever way they see fit. After all, the surplus cash belongs to the shareholders. Now, there are two ways in which surplus cash can be returned to the shareholders. The most common way is through the payment of cash dividends. Cash dividends…

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