If you don’t already know, investing in the stock market can be very lucrative. In fact, the S&P 500, an index of the largest American companies, has averaged an 8% annual return! When invested over long periods of time, investors should see their money compound tremendously.
There are three key ways that investors can make money in the stock market: stock appreciation, dividend payments, and stock buybacks.
Stock market appreciation is just as the name suggests. Whenever a stock price increases above the purchase price, investors make money on their investment. For example, Investor A purchased shares of XYZ Company for $100. Two weeks later, the stock price of XYZ Company increased to $110. If the investor decided to sell at this point, they would realize a gain of $10, or 10% on their investment. It is important to note that gains (or losses) in the stock market are only made official when you sell the investment!
Dividend payments are cash payments made by a company to its investors. Through dividends, investors can receive a share of the company’s profits! Dividends are typically paid on a quarterly basis, or every three months. They are also paid per-share that is owned. For example, XYZ Company pays out a quarterly dividend of $1 per share. If an investor held one share of the company for a year, they would make $4 from dividend payments. If the investor owned multiple shares, they would have made $4 on each share they owned.
Stock buybacks happen when a company decides to repurchase shares of its stock. Stock buybacks are an effective way for companies to provide value to their shareholders due to its efficiency and tax-benefits. For example, XYZ Company currently has 100,000 shares available for purchase on the stock market. XYZ Company decides to repurchase 5,000 shares of the company from investors. By purchasing its own shares, the company stock price should increase, creating positive gains for investors.
Investors can make money in a variety of ways through the stock market with stock appreciation, dividend payments, and stock buybacks. When investing, it is always a good idea to invest for the long-term and pay minimal attention the short-term price movements in the market!