a classification of the common stock company offers shareholders in place of, or in addition to, a dividend. Accumulating shares is also compensation employees or shareholders get in the form of stock instead of cash, often for beneficial tax purposes.
How Accumulating Shares Works
Accumulating shares is common stock that shareholders of a company get in place, or sometimes in addition to, a dividend. When you take accumulating shares instead of cash dividends, you as shareholders don't need to pay an income tax on the present year's distributions. However, it remains mandatory to pay a capital gains tax, if any, in whatever year you sell the shares. Sometimes companies pay shareholders these types of shares together with cash dividends as stock dividends.
It is especially true for stocks that investors rely on for regular income. For instance, when a company needs to preserve cash on its balance sheet, it may offer to accumulate shares to existing shareholders. Another common reason for distributing shares is to increase the number of outstanding shares, simultaneously boosting the public market's liquid assets. It is vital to note that no existing shareholder will suffer dilution of their holdings since the shares are going to them rather than other investors.
Accumulating shares is also an attribute of mutual funds. Usually, a mutual fund investor chooses between collecting income distributions in real money from the fund or making a reinvestment of the income into the fund. If an investor decides to reinvest, the revenue goes into buying more shares in the fund. As a good investor, because equity prices tend to increase over time, common money wisdom encourages you to accumulate shares rather than cash dividends.
Examples of Accumulating Shares
For example, suppose you have acquired shares with ABC Holdings, and you expect to receive your paid dividend at the end of a quarter. In that case, the company declares its earnings to be shared and the date of payment. You can now expect to receive this payment in the form of a dividend check that you can cash, or you get accumulating shares (which are additional stock shares). Instead of earning money as your dividend immediately, you are getting more shares, potentially bringing you more money in the future.
In either case (whether you get cash or accumulating shares), your dividend is a taxable income. However, once you receive accumulating shares from ABC Holdings, you will not pay any income tax for the current year's distribution as your dividend. Nevertheless, if you decided to sell these shares, you will pay capital gains tax for the sales year.
Accumulating Shares vs. Share Dilution
While accumulating shares means that you and other current shareholders get to accumulate more shares in ABC Holdings, share dilution is the opposite of accumulating shares. Share dilution happens when a company chooses to issue additional stock to other investors and reduce current shareholders' ownership proportion. If ABC holdings offer you and other shareholders the option of receiving dividends as accumulating shares, then you will not face dilution of your holdings. It is because the company hasn't sold the shares to other investors.
However, if ABC Holdings opts for share dilution, they will create more shares and sell to new investors. The consequences of this will be an increase in the total shares outstanding and a dilutive effect on your ownership percentage.