Two ways to make money with shares

Du kanske minns att aktier representerar ägande i ett företag. Det finns två sätt att tjäna pengar med aktier. Som ägare har du rätt till alla rättigheter och skyldigheter som en företagare har. I ett börsnoterat företag är ditt ansvar begränsat till det ekonomiska åtagande du har till företaget. Detta är det belopp du betalade för dina aktier. Ditt värsta scenario är att företaget blir insolvent och din aktie blir värdelös. Ditt ansvar sägs vara begränsat eftersom ingen kan komma efter andra tillgångar du kan behöva för att täcka företagets eventuella skyldigheter.

You may recall that shares represent ownership in a company. There are two ways to make money with shares. As an owner, you are entitled to all the rights and obligations of a business owner. In a listed company, your liability is limited to the financial commitment you have to the company. This is the amount you paid for your shares. Your worst-case scenario is that the company becomes insolvent and your share becomes worthless. Your liability is said to be limited because no one can come after other assets you may need to cover the company’s possible obligations.

Voting rights

You also enjoy certain rights. The first is the right to vote for the board. The shareholders as a whole elect a board to hire and lead the management team. The company’s managers hire and supervise executives who implement the plans and directions of the management team. The managers, in turn, hire the employees who perform the functional tasks of the business.

Share of profit

The second right shared by shareholders is a right to their proportional share of the profits. As the company makes money, the board has a choice to make. Do they give the shareholders their share of the profits, or do they keep the profits in the business with the intention of growing and expanding the business, with the expectation that greater profits can be generated in the future? If profits are retained in the business, they are called retained earnings on the balance sheet. Profits distributed to shareholders are called dividends.

Dividends

Some investors prefer dividends. You’ve heard the expression “a bird in the hand is worth two in the bush”. Dividends are usually paid in cash and the investor is free to do what they want with their share of the company’s profits. They can pay their bills, invest in another company or simply save the money. Some companies offer investors the opportunity to use their dividends to buy more shares without having to pay regular trading costs. These programs are known as DRIPs or Dividend Reinvestment Programs. But no matter what direction the shareholder takes the taxman will come. Often, it is the tax that motivates investors to avoid dividends. These investors prefer the company to retain its profits and reinvest in itself. Their hope is that as the company grows in value, so will the price of the stock they own. As the share value grows, so does the value of the investor, but taxes are not a problem until the investor actually sells their shares. If the investor sells the stock for more than they paid for it, the difference is a capital gain. As long as the stock was held for a year or more, it is currently taxed at the same rate as dividends. If the stock was held for less than a year, ordinary income tax rates apply. So the two ways to make money with shares are dividends and capital gains. Investors should have a clear understanding of their strategy before buying shares so they know the best way to evaluate any share purchase. When you get started buying shares, remember that having a diversified portfolio is key to the long-term success of your portfolio increasing in value. It won’t do you much good to have made a lot of money one month, only to lose it the next, and have no plan to keep you on track to achieve your investment goals.

Key words

– Retained Earnings – profits earned by a company that are retained by the company to fund future growth and development. – Dividends – shareholders’ share of company profits distributed in cash. – DRIP – dividend reinvestment program. A program that allows shareholders to use their dividends to buy additional shares in the company without paying trading costs. – Capital gains – the profit made by selling a share for more than an investor paid for it. – Capital loss – the loss an investor incurs if they sell their shares for less than they paid for it.

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