Common Stock

Owners of stocks (equity securities) have the opportunity to benefit from a company’s financial gains and increased value. When a company does well, or is expected to do well, the value of its shares rises. An equity investor can make money by buying at a low price and selling at a higher price. This is called a capital gain because it’s a gain in the original capital invested. It’s also called appreciation because the stock appreciates (rises) in value. The incredibly great thing about investing in equity securities is that these gains are potentially unlimited. But that’s not all! When a company does well, and by that we mean it makes money in the form of net income (profits), it may choose to distribute some of this income to its shareholders as dividends. Dividends are cash or stock paid to shareholders for each share that they own. For example, XYZ Company may choose to pay a quarterly dividend of 25 cents per share. If a shareholder owns 100 shares of XYZ, he will be paid $25 (100 x $0.25) in dividends each quarter. So owners of equity securities have the potential to make money two ways: first, through a rise in the price of the stock, also known as appreciation or capital gains, and second, through dividends. However, it