1.3.  Common Stock

When an investor purchases stock (also called shares) in a company, he becomes an owner of the company and has the opportunity to benefit from the company’s financial gains and increased value. This is because when a company does well, or is expected to do well, the value of its stock usually 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 is a gain in the original capital invested. It is also called appreciation because the stock appreciates (rises) in value. A great thing about investing in equity securities is that capital gains are theoretically unlimited. But that’s not all. When a company does well, and by that we mean makes money in the form of net income (the accounting term for 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 an investor owns 100 shares of XYZ, he will be paid $25 (100 x $0.25) in dividends each quarter. So owners of equity securities (stocks) have the potential to make money two ways: first, through a rise in the price of the stock, also known as appreciation or capit