Stock Prices

Let's say that a new corporation is created and in its IPO it raises $20 million by selling one million shares for $20 a share. The corporation buys its equipment and hires its employees with that money. In the first year, when all the income and expenses are added up, the company makes a profit of $1 million. The board of directors of the company can decide to do a number of things with that $1 million:

It could put it in the bank and save it for a rainy day.
It could decide to give all of the profits to its shareholders, so it would declare a dividend of $1 per share.
It could use the money to buy more equipment and hire more employees to expand the company.
It could pick some combination of these three options.
­If a company traditionally pays out most its profits to its shareholders, it is generally called an income stock. The shareholders get income from the company's profits. If the company puts most of the money back into the business, it is called a growth stock. The company is trying to grow larger by increasing the amount of equipment and the number of people who run it.