You may have probably never known this but there are actually two ways to get rich and profit from owning stocks and mutual funds.
Stock Ownership
One way in which stock ownership pays a return is through capital gains. When buying a stock, an investor is typically hoping that the sales and revenues of a company will rise, producing a capital gain when the shares are sold later at a higher price. For example, let’s say we bought 100 shares of McDonalds in June 2005 at $27.75 per share and sold it 10 years later at $95.00 per share. Avoiding all dividends and potential stock splits, our capital gains would be $6,725. The objective is to buy low and sell, right? Of course! So, that’s one way to make money!
Dividends
Secondly, the other way to profit from purchasing stocks/mutual funds are from those companies that pay out dividends – a distribution of profits by a corporation to its stockholders. More larger and established companies (blue chips) pay dividends – usually on a quarterly basis.
To give you a clearer picture on the way this works, we’re going to put our McDonalds Corporation stock in play again. On July 24, 2015, McDonald’s stock closed at $96.10 and paid an annual dividend of $3.50 per share. So, let’s say you currently own 1,000 shares of McDonald’s stock. You will earn $3,500 for the year because for each share you own (1000 shares), McDonald’s dividend will pay you $3.50 per share (1000 x $3.50). Not too shabby!
Go Get Rich!
So, there is not only one way to get rich by owning stocks and mutual funds – but possibly two ways (if the company pays a dividend). Betting on the rise and fall of stock prices can be quite exhilarating, especially when your share prices soar. But while we wait, there is certainly nothing wrong with receiving a steady flow of passive income (dividends), which you can choose to spend or reinvest.