How Do You Make Money Investing in Stock?
There are two ways to earn money when you invest in stock: price appreciation and dividends.
If the company you invest in does well and makes money, its stock becomes attractive to own, and soon more investors will want to own some of the company that you own. That's when supply and demand works in your favor. The greater the demand, the more the price is driven up. The price moving up (because more people are buying the stock) is known as
price appreciation -- your stock increases in value. You'll realize a profit, or gain, when you sell stock that has appreciated.
Say you buy stock for $10 a share, and it grows, or appreciates, to $15. Smart you!
You earned $5, and the value of your share of stock increased, or appreciated, by
50%. The flip side of that is price depreciation, which is another way of saying that
the price of a stock went down.
In addition to the potential price appreciation, or attractiveness, of your stock in the
public's eye, you can also earn a
dividend when you own stock.
Distributing dividend payments is another way for a company to share its profit with
you. This means that each quarter the company pays you a certain amount of
money for each share of stock you own. Usually dividend payments are much
smaller than the price of the stock. For example, a company whose stock price is $15 per share might pay a dividend of 4 cents per share each quarter.
Many times, dividends come at the expense of greater price appreciation, because the company is distributing its profits to shareholders rather than reinvesting these profits back into the growth of the company. However, companies that pay dividends can be very attractive to investors, because they offer a steady stream of income. Whichever you pick -- current income (dividends) or longer-term growth (price
appreciation) -- as your priority depends on what you need.
Next: Exploring Market Indices. To get a head start, click here.
TheStreet.com Ratings Staff
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