How Do Stocks Make (and Lose) Money?

When you own stock, you don’t get interest like you would earn if you kept your money in a savings account, but certain companies do pay dividends to every shareholder. 

Dividends are the way companies distribute their profits to the investors who own them and are entitled to share in their success. The amount paid per share tends to change as the company’s profits rise and fall. This is one reason why investors watch those quarterly earnings reports so closely. Depending on the company, dividends can be paid every quarter, once a year, or whenever the board of directors decides to distribute the profits. Old or conservative companies like banks and utilities generally pay dividends because they no longer need to use their profits to grow or improve their operations—they’ve gotten about as big as they’re going to get, so they might as well share the profits. Younger companies in more innovative industries like computer technology or drug research tend to skip the dividend payment and plow those profits back into their research or marketing budgets. 

When these growth-dependent companies ruled the market back in the 1990s, dividends became an endangered species, but they’re making a comeback now as investors return to more triedand- true types of stocks. The other way to make money from stocks is to sell your shares for more than you paid for them. This is the old “buy low, sell high” approach that you’ve probably heard about. It sounds easy in theory, but it’s hard to achieve consistently because nobody really knows in advance the perfect time to buy or sell. Most advisors believe that the average person is better served by simply buying quality investments (of any type) at a reasonable price and then holding onto them until she needs the money to fund retirement or for some other purpose. Of course, what counts as a “reasonable” price depends on your investment goals and how much you’re willing to pay to achieve them. The ability of stocks to become more valuable is called capital appreciation, and your profit (or capital gain) from buying low and selling high is simply the difference between the two prices. 

Naturally, it’s possible that a stock will decline in value after you buy it, in which case you would be looking at a capital loss if and when you sell. Every company is different, and there’s no easy way to pick a winner.