So now I want to make a very basic point about corporations and shares. If I give you 1,000 shares in a company and you wonder, what does that mean that I own 1,000 shares? You have to ask another question which is, how many shares at there had standing? So we talked about this before. I'm not up to date on this but it might share of the company is equal to the total number of shares I own divided by the total number of shares outstanding for the company. So it's my number relative to the tutorial. If I own half of the shares outstanding then I own half of the company. Companies do things called splits where they will break a share in 2, and call one share another 1.5 shares or 2 shares or whatever. They do that periodically. Why do they do that? It seems that companies think that there's an optimal price per share that encourages investors look right, feels right. And so they will change the number of shares from time to time to try to hit a target for the price per share. In the United States, by tradition, the target price per share is something like $30 a share. So suppose your company has done very well and the price per share which was originally $30 is now up to $60. Your board of directors may then, someone might bring it up at the board meeting, we should do a two-for-one split to get our share price back down to the magic $30 a share. So then you would then send out a letter to all of your shareholders and saying, we're doubling the number of shares, and by the way this year, you now have twice whatever you did before. Well, I put down my slides. This is essentially meaningless. Other doing is changing the unit of measurement, it's like going between [FOREIGN] and [FOREIGN]. It means nothing. By the way they even do it. Well, why not? One reason they do it is they just think if the share price gets too high, you can't buy a fraction of the share. It gets to expensive, and people like to buy in round lots because the brokers encourage that. About 100 shares. So if it's $30 a share, you can buy an investment round lot for $3,000. But it gets expensive if you don't split. Now one company that doesn't split is Berkshire Hathaway. That's Warren Buffet's company. And it's been selling for thousands of dollars per share. So you can't even buy a round lot unless you a substantially wealthy person. Warren Buffet does that out of some principle. He can do it. Or I should say, his board does that. They can do it because it's all meaningless. But not totally meaningless just that it gets hard device small amount of share. You can buy one share but you can't buy a half of share. So now the company is defined as I said in basic terms, by a board of directors. The company has a constitution, called the Corporate Charter, and the Corporate Charter defines how things are done, but the general principle is guided by state laws. It's state governments that manage. You have to incorporate in a state, which means you choose a state to make your headquarters in. And that state then restricts what you can put into the corporate charter. Delaware is the most popular state for incorporating, because, well, it's the smallest state in the United States and smallest states have an incentive to be very generous to corporations, and they will all move to your state and you end up making money. Big states wouldn't do that because they already have corporations we need to be there. So the corporate law in the state defines the rights and responsibilities of shareholders and the board of directors. Well, it might say something about dividends but it doesn't tell the company what to pay out. This is something that's often forgotten. You buy shares in a company to get dividends. >> [SOUND] A dividend is a distribution of money from the company's earnings to its shareholders. [SOUND] >> That's why, in America at least, especially, we're very clear. Why would you buy share in a company? Hey, they pay dividends. It's like interest except its variable. And tends to grow through time. Whereas, debt contracts doesn't grow, it's just fixed. So you're doing it for the dividends. Remember we had the return on a corporation has two components, the capital gains which is the appreciation in the price per share and the dividends. So people tend to talk so much about the capital gains. The movement of the market, they forget about dividends. Some people don't even know there are [LAUGH] dividends. That's actually the whole reason for being for the stock market. Ideally anyway, you buy shares to get dividends. And, in fact, if you look at history, up until recent times, most of the returns you get on the stock market are in the dividends. People think, well no, isn't it just that the market has soared? Well, historically, over 100 years, dividends are more important. The stock market goes up and down, creates capital gains and capital losses, but dividends are what it's all about. So companies don't have to pay a dividend but typically young companies don't. Once they're mature they like to start paying dividends and it signals to the world that they're really making money. If you're investing a company that never pays the dividend, you start to wonder, is this real or is this a fraud? I never get a penny from them. So once they're into making money, they think it impresses investors to get dividend checks. All right, I remember my own company. We incorporated in Delaware. My first company, Case-Shiller Weiss Incorporated. And we didn't have to pay a dividend. I remember we had a board meeting where we talked about exactly this. We've never paid a dividend. We gave shares to a lot of our employees as incentive. But someone said, they don't even believe in it. Nothing has ever happened. So we should pay a dividend. But we didn't. We held on. The employers eventually did well when we sold the company. They found out that their shares really were worth something. But we should have started paying dividends and make it clearer. We didn't. So when a company pays a dividend, what happens to the share price? Well, very simple, it drops because the company used to have the money and now it doesn't. It paid it out. The share price pretty much has to drop and I don't suppose it always does. Because funny things happen but the basic idea is that a share drops in value when a dividend is paid. But I have to qualify that. It doesn't drop in value when you get the check in the mail for you dividend. That would be variable anyway, right? They don't necessarily pay them out in the exact moment. So a company has to define what they call an X dividend date. That means, they will pay out the dividend, this dividend, typically chorally dividend every three months. They'll pay out this dividend to shareholders of record on this date. So company values drop routinely on the ex dividend date. That doesn't mean bad news about the company at all. >> So I had a question about companies and different dividend payment systems. So some companies like to boast about they always pay dividends. They never miss it. Why would they want to emphasize this? And what would happen if they had to cut back on their dividends or they don't miss their dividends in a period? >> Well, I think this is an essentially behavioral human question. So the reason they don’t want to miss a dividend is because they think that will harm the investor support. They don’t want to see their stock price fall. If the investors lose confidence in the company, these tag price can fall and then the management starts to worry that that'll be taken over. If the price gets too low, take over, people will think, I'll buy it and I will shut it down and they'll sell it of all their assets may be you can get, if it gets low enough. So it's a big fear they don't want investors to have a bad attitude. So then why would you as an investor be disturbed if a company didn't pay a dividend? Well, I think it's a sort of fundamental human miss trust. You don't know that these guys are on the level, maybe they're crooks or maybe they're not. It's like missing a payment on your credit card. You have a credit rating that depends on you actually making these monthly payments. And you could take the attitude, well, I'll miss it once and I'll pay the fine. What difference does it make? But your credit rating will go down if you do that. So most people personally think, I'm going to pay every month, this is something I'm really going to do. And they kind of imagine that it's like that with dividends with company, if they miss a dividend it means they're kind of unreliable, untrustworthy, now they didn't have to think that but that apparently is how a lot of people think. So that's why lots of companies don't ever want to miss paying a dividend. >> Couldn't missing a dividend also be a real indication of financial trouble though and maybe that's why investors- >> Right, right. >> Why a red flag is raised? >> Yeah, now the thing is that a dividend is not promised. The corporate law says that they can pay a dividend at the discretion of the board whether they want to or not. And many companies go years without paying dividends, but the public might have some preconceived notions and think it’s like my credit card bill and if their not paying, there’s something wrong here. Now they could stop paying a dividend for perfectly good reasons. Like they want to do something with it that's more productive, but the investors might not understand. By the way, I don't mean that firms never miss paying a dividend, I'm just saying that some firms pride themselves on never having missed a dividend.