Making Money With Stocks -- Dividends vs. Capital Gains There are two ways to make money by investing in stocks. One is by earning dividends, and the other is through capital gains -- selling a stock for more than you paid for it, and pocketing the difference.				> Home > Glossary > Support
		Dividends are what stockholders in a company get if the board of directors decides to share the wealth. Of course, this implies that there is wealth (after-tax profits) to share, and that management doesn't want to reinvest it in the company. Dividends are usually distributed quarterly.
		Here's an example of how dividends work.
		Say Company X made $250,000 in after-tax profits in the third quarter of 1999. The company has 50,000 shares of stock outstanding (it has issued, and stockholders have bought, 50,000 shares). The company decides to pay out all of its earnings as dividends, which in this case would be $5 for each share held ($250,000/50,000 shares). If you own 500 shares of Company X, you just made yourself $2,500 (500 shares x $5).
		Companies that pay large dividends tend to be mature, stable companies with little need for cash to reinvest into the company. For example, utilities tend to pay a large proportion of their earnings as dividends. Firms with high potential growth tend to reinvest their earnings back into the business, and consequently pay relatively low dividends.
		What kind of investor would be interested in dividends? It depends. An investor with a short time horizon until retirement (up to five years) might favor dividend-paying stocks in addition to fixed-income investments like bonds. Unlike bonds, the dividend of a well-chosen income stock often rises over time and can help counter the effects of inflation. REITs are required by law to distribute a large part of their profits, and therefore their stocks are popular with retirees, who enjoy securities providing a rather steady cash flow.
		Of course, you have to pay tax on dividend income, and it is generally higher than capital gains tax. That's why investors with a long time horizon are often less interested in the dividends a company pays than whether the value of the stock will appreciate and give them adequate capital gains when they need it.
		Capital appreciation is an increase in the value of stock you hold, and capital gains are the profit you make when you sell it. The two terms are often used interchangeably.
		If you buy 100 shares of Company Y stock at $10 a share ($1,000), and you sell it at $12 a share ($1,200), you will make $200. Keep in mind that you only make money if you sell the stock at a price exceeding the purchasing price, after taking commissions into account -- and the same goes for losing money if the price goes down. Also, you will have to pay capital gains tax on what you earn.

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