How Investors Make Money From Stocks.
Investing in stocks is a great way to make money and build wealth over time. Compared to mutual funds, stock investments offer investors arguably the highest potential for growth, but this growth comes with more risks. How do you invest in stocks if you don't understand how they make you money? Here's how.
You make money from stocks in two major ways. First, you make money when the company's stock price goes up. You also make money by earning dividends. Dividends, which are usually paid quarterly, are a portion of the company's earnings that it pays to shareholders. Not all companies pay dividends. In the interest of simplicity, here's a simple overview of how investors make money from stock investments. Let's consider a new fictional company: Company X.
Being the novice and curious investor that you are, you came to the realization that the $200 tucked away in your mattress for the last 5 years has collected $0 in interest and even lost value through inflation. You also came to the conclusion that your sibling's $200 that has been sitting in a bank's very low-yield savings account for the last 5 years has earned mere pennies in interest payments. This is pure nonsense! Having finally become money-wise, you purchase Company X's stock at $5 a share with your $200. What do you have to lose? You acquire 40 shares (200/5 = 40) and exercise patience with Company X. Company X becomes profitable. Five years later, the stock price has climbed to $15 a share. Company X has decided to share its profits with its shareholders (lucky you!) with a dividend payment of $0.20 a share. You sell your 40 shares and walk away with some hard cold cash. How much did you make?
1. You make money from selling shares.
By selling all your shares of Company X's stock at the new price of $15, you earn: 40x15 = $600! Your sibling is still collecting pennies from the bank in interest, if at all!
2. You make money through dividends.
Remember that dividends are normally paid out quarterly, but to keep things simple and interesting, we're going to assume this is the first time Company X is paying its shareholders that $0.20 dividend. Your dividend earnings would be: 40 shares x 0.20 = $8! In 5 years, you earn more in dividends than you earn in interest from your mattress or your siblings' bank pays him/her in interest! Overall, having invested your $200 in Company X's stock, you proudly walk away with $608! Congratulations on your first legal stock market heist!
There are two major ways investors make money from stocks: selling shares and earning dividends. Of course the example illustrated above did not take into account broker, trading and other fees. There is also the possibility that Company X's stock price could decrease in value below the initial $5 or even trade higher than $15. But we still believe that investing in stocks offers investors the highest potential for building wealth.
Like this article? Please share and leave us your feedback in the comment section and help us improve and grow. Subscribe below to get our latest articles. Here are a few more articles you may find useful: I buy the U.S. economy with a single index fund. The initial result is stunning! | How to earn free money as a micro investor | How to invest $100 | How to invest $50 | The engines that power stock market wealth | Cash is trash, not king. Invest it! | Stocks vs. index funds vs. ETFs: what's the difference?