Stock represents ownership in a company. A company's stock is typically divided into a specific number of shares, with each share representing an equal amount of company ownership. The more shares you own, the larger the percentage of the company you own. There are a number of strategies for buying, holding and selling shares of stock, but there are two primary ways of making money with stock: capital appreciation and dividends.
"Capital appreciation" refers to the money you make when you sell shares for more than you paid for them. You must take into account any commissions you paid when you bought or sold sold the stock.
Reasons for Capital Appreciation
Capital appreciation results when the price of the stock increase beyond the price you paid for it, but you don't realize any gain until you actually sell the stock. A number of factors can influence the price of your stock. The company might have a positive quarterly report. The company might have positive news, such as a new patent. A stock analyst might have issued a "buy" recommendation. However, any of these situations can occur without making the stock price increase. There is no guarantee that the price of the stock will go up. Stock prices can decrease, resulting in a capital loss.
You might receive a portion of the profits generated by the company through the payment of dividends. The company's board of directors is responsible for declaring dividend payments. Funds set aside for dividend payments are divided equally among common stockholders on a pro rata basis. Each share of stock earns the same amount of dividends. Dividends are typically paid out on a quarterly basis. A company can earn a profit but still not pay a dividend. The board of directors may choose to use those profits for future growth, to pay down debt, or to cover operating expenses.
Selling Covered Call Options
You might be able to increase your income from stocks by selling "covered call" options. When you sell a covered call, you receive a premium in exchange for agreeing to sell your stock for a set price, known as the strike price, for a set period of time. If the call option expires without being exercised, you maintain ownership of your stock and you keep the premium. If the call option is exercised at a strike price that is more than the price you paid for the stock, you will have capital appreciation on the sale of the stock, plus the amount of the premium. If the call option is exercised at a strike price that is below the price you paid for the stock, you will have a capital loss. But a portion of the loss will be offset by the amount of the premium.
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