How do you make profit from investing in the stock market? ? Finances

When you invest in real estate you can make money in one of two ways.

1) Rent the space for earned income
2) Sell the property for a higher price and take the capital gains.

The stock market works in the exact same way. You can make money by:

1) Receive a part of the company you own?s (your stock?s) earnings in the form of a dividend
2) Sell the stock for a higher price and take the capital gains

To a commercial real estate investor, the value of a property depends on how much rent money can be generated from the property given what the owner could get elsewhere.

For example if a real estate investor knew he could get $10,000 per year in rent revenue, and was equally as confident that he could earn 5% from a US government bond (perhaps a bit optimistic), then he would be willing to pay $200,000. This is because if he bought the house at this price, he would earn a 5% return in the form of rent revenue.

Of course the investor could also begin to raise rent. As the property nearby increases in value over time, with improvements, or simply due to inflation, this property owner could theoretically hype rates to make his property more valuable. If after 10 years he raised his rent to $20,000 per year, then he could theoretically sell the property for twice as much as before. This is because the annual rent earnings are twice as high. This capital gain would actually have resulted in a 7% annual return (which is how much it takes to double an investment in 10 years).

Stocks work the same way. The value of a stock depends on how much money the company you own (via the stock) earns. If the company is able to earn a lot of money (like MacDonalds, $5.75 Billion in 2009), then the company is going to be worth lots of money. Some companies choose to pay most of their earnings out as dividends, however most companies choose to reinvest earnings back into the company (like MacDonalds Corp for example). The dividend payment is nice, but the company is able to earn a higher rate of return by building more MacDonalds restaurants (so long as the stock price is reasonably high, if it is very low the company may consider buying back and retiring its own shares of stock ? which makes each remaining share more valuable). The growth of earnings caused by the additional new MacDonalds restaurants results in higher earnings in the future which results in a more valuable MacDonalds Corp which results in higher share prices which results in capital gains for each shareholder.

In 1967 MacDonalds Corp was composed of only a few stores earning around 50 million dollars per year total. In 2009 MacDonalds earned $5.75 Billion. This means that MacDonalds? earnings today are about 115 times higher than they were in 1967. Not surprisingly, MacDonalds stock is also about 115 times higher than it was back in 1967 when the price of the stock was around 60 cents per share. Today the shares are trading at about $70 per share. Of course this 100 fold return capital gain wasn?t the only thing you got from investing in MacDonalds back in 1970. You also got a good chunk of dividends along the way (just in case you needed to buy a cheeseburger). It pays to invest!

Source: http://finances.solve-up.com/investing/how-do-you-make-profit-from-investing-in-the-stock-market/

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