How Stocks Earn Money

Stocks earn money in two ways: increasing in value and dividends. When a company's revenues (money earned) and profit are increasing, the value of a share of its stock increases. As a result, buyers are willing to pay more for it. Capital gain is the difference between what you originially paid for a share of stock and its present value. If its value decrease, that's a capital loss.

Stocks also may pay dividends. The key to growing investments is reinvesting your captial gains and dividends. When you reinvest the money you make from investments, you buy more share with it instead of spending it. Over time, you own more and more shares and have more and more gains and dividends.

Investing - Rish and Reward

You invest because you think that you can make money. However, you can lose money too. That's risk. For example, you could buy a share of stock for $10 and it could increase in value to $50 or decrease in value to $0.

Some stocks are riskier than others. Often the riskier an investment is, the greater it potential gain. A larger potential gain can also mean a larger potential loss. How much risk is appropriate? It depends on three factors:

Your age. The younger you are, the longer yo have to gain back money you lose because you'll be working and investing for many years.

Your financial situation. If you support a family or your saving for a specific short term goal then you will want to take less risk.

Your personality. Some people are adventurous while others are nervous when they feel their money is at risk.

Investing - Risk and Reward

Each method of investing and every unique investment comes with its own risk and potential benefits. When you select an investment, make sure that you understand what the risks are as well as what type of investment will work best for your financial situation. Here are several different ways to invest your money:

Savings Account
Certificate of Deposit
Money Market Account
U.S. Bond
Mutual Fund
Stock
Collectibles

Where should you invest your money? You also need to consider the following when investing:

Safety - How risky is the investment? Safety is a measure of risk. A safe investment is one with little risk of losing money. An investment that is not considered safe may have a high likelihood of lsoing some or all of the money that you invest.

Liquidity- How easily can you get your money out of the investment? Can you afford to leave your money in an investment for a long period of time?

Return on investment - How much might your investment earn? Investments with a low rate of return might not make much money. But they also may not cost much to begin with.

Losing at the investment options listed above, collectibles is a risky investment but it could potentially bring a great rate of return. A savings account has very low risk, but it may not bring your a large return.

In order to make higher returns, you may need to invest more, but that may also mean that you risk more. Investments with lower potential returns may earn less, but you're less likely to lose your money. You need to think of each investment as a trade off between risk and reward.