How we earn profits from shares?

There are two ways for shareholder to benefit from the profits of a company, capital appreciation or dividend.

Usually, a company distributes part of the profit it earns as dividend. Say a company earned a profit of RM 10 million in 2004-05. It keeps half that amount within the company. This is used for a variety of purposes -- buying more machinery, land or raw materials, building a new factory or setting up a new office. It could even be used to repay loans. The other half is to be distributed as dividend.

Assume the company has 10,000 shares. This means half the profit -- i.e., 5 million willd be divided by 10,000 shares. That means each share will earn RM 500, which will be declared as RM 500 per share. If you own 1000 shares of the company, you get a cheque of RM 50,000 (100 shares x RM 500) from the company.

For the case of capital appreciation, the share holder will buy shares in lower price and sell it when the price goes up to at least 10-20%. No income tax will be charge on capital appreciation.