Think of it like powdered milk. Not exactly what you dream about when your grandma sends you a care package of cookies. But it works okay if the real stuff isn't around.
Dividends are cash payments companies make to stockholders. You own 100 shares of a firm that issues a quarterly dividend of $1 a share. Every three months, you get a check for $100. It's income generated just by holding a stock. Many stocks don't pay dividends. If a company believes it can create more value by reinvesting funds in it's business, it will keep the cash itself instead of sending checks to its shareholders. However, if you own these stocks, there are still ways to generate income from the shares. They aren't dividends, really. But, like dividends, they represent income you get from the shares you hold.
The most common way to create synthetic dividends is using covered call options. A call provides the holder the right, but not the obligation, to buy a stock at a certain price during a certain time frame. With this form of synthetic dividend, you sell this right to someone else. You receive a premium from the contract...income from your shares.
The potential downside comes if the person chooses to exercise their option. Now you have to sell the shares at the prearranged price, which might be below the current market price for the stock.
Related or Semi-related Video
Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
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