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In our article about stocks, we began to scratch the surface on what dividends and capital gains are. We will now go into a little more depth without trying to confuse you.
As you've probably already figured out, people buy stocks because they hope to make money. Making money in the stock market doesn't require you to be an upper-class citizen with a lot of money to invest. It just requires you to pick the right stock.When a person makes money through the stock market, they've probably made it either from dividends or capital gains...or maybe even both. A dividend is a small payment that a company gives to investors. This payment is a small share in the company's earnings. Here's a quick example of how this works:
Ok, let's say you buy a few shares of a stock you like and that company makes $100 million that year. They have sold 100 million shares of stock and they decide to give investors 30 cents for each share. This means that they will pay you 30 cents that year for each share that you own. It may not seem like a lot but that cost the company $30 million...which is quite a chunk of change!After the company pays investors, they can then use the rest of the money to help grow their business by doing such things as hiring more employees or buying new equipment.However, capital gains are what most people invest in stocks for. A capital gain is the difference that you pay for a stock and what you sell it for. Here's a quick example of how capital gains work: Last year, you purchased 10 shares of stock at $45 per share. The company did well and this year the stock is worth $60 per share. That means you have made $15 per share of capital gains and, because you have 10 shares, you've made $150 total!Capital gains and dividends are income, money gained from work or investments. The IRS (Internal Revenue Service) taxes you for both dividends and capital gains because of this. So if you want to get started in investing, you should make sure that you know you'll be paying taxes on any money that you make.If you continue to invest throughout your life, these gains can make you a very rich person. And if you're starting at a young age, the amount that you can make by keeping your money invested and acquiring more capital gains and dividends is extraordinary!
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