Beginning investors may wonder how, exactly, they can profit by owning stocks. Read on, ye beginning investors.
There are two main ways: dividends and price appreciation.
Imagine that you buy 100 shares of International Alphabet Corp. (ticker: ABCDE) for $50 per share. You spend $5,000 total (plus perhaps $12 commission to your discount broker). Let's say that ABCDE is paying a $2 dividend when you buy it. That means that as long as you hold on to your shares, you'll be paid $2 for each share annually -- that's $200 per year. Over time, companies typically increase their dividends. So 10 years from now, you might be receiving $5 per share, or $500 per year. Each year that you hold the stock, you'll be paid a dividend. Not every company pays a dividend, though. This is fine -- some are growing quickly and need that money for other purposes, such as fueling growth, and they may more than make it up to you via price appreciation.
Let's look at price appreciation now. Recall that you bought your shares of International Alphabet for $50 per share. Well, 10 years from now, they may be trading at $130 per share (that's about 10% growth per year). If so, then they're worth $13,000 to you now. You spent $5,000 for them, so if you were to sell now, you'd make a profit of $8,000 (on which you'd pay capital gains tax). And if there had been dividend payments all along, that's icing on the cake.
