A question many New Investors often have is “How do you make Money from Stocks?” Well today we will be explaining that very thing so that you can get an understanding of how stocks work. With Stocks there are two primary ways you make money. You can make money either through Capital Gains or Dividends. We will go into detail as to how both work below.
Capital Gains
Capital Gains is simply the profit you make from selling an asset for more than what you bought it for. In the case of stocks they trade daily on the Stock Market/Exchange. This means that over time the price of the stock will fluctuate up and down multiple times per day. As a result, depending on what price you purchase the stock at throughout the day at any given point you may be up or down depending on the current price or value of the stock. For Example, if you by a stock for $1 and the price goes to $2 then you have a unrealized gain of $1. What that means is that if you choose to sell the stock at that price of $2 you’d make $1 in profit. That $1 would represent your Capital Gain. It is for this reason that the goal is to buy low and sell high. As the more you are able to sell the stock for the more money you can make from Capital Gains.
Dividends
Dividends are a distribution of Capital or Cash to Investors within a Business. As with any business that operates with the intention of generating a return for shareholders. A company listed on the stock market is no different. They will always aim to maximize shareholder value. What this means is that a company will always try to find ways to ensure investors whom put their money into the business can earn a return on their investment. One of the ways companies can do this is by paying dividends. These payments can come in the form of a Check or Electronic Deposit. The payments are done at the discretion of the Board of Directors. The board will meet and determine if it is prudent to pay a Dividend. The goal of a dividend is to share the profits of a business with its investors/shareholders. Investors are rewarded for investing in the company through dividend payments. Dividends are paid per share meaning the more shares you have the more money you can make from dividends. For example a company may decide to pay a dividend of $0.50 per unit of stock. As a result if you own 100 units you’d receive $50 in Dividends ($0.50 x 100). However an investor that has 1000 units would receive $500 in Dividends ($0.50 x 1000).
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