/Lydia Wanjiru/ -- One sure way to build wealth is through stock investments. A stock is a share or a portion of a corporation’s ownership. Choosing the right stocks to invest in is a key factor to ensure that you get a solid return on your investments. Investing in shares requires a basic understanding of how stock investments work so that you can make an informed decision when you invest. You need to know how the stock investment will help you make money. Here are 3 different ways you can benefit or make money from stock investments:
1. Capital Gains
One way to earn from stock investments is through capital gains. When you buy a stock, you ideally invest in the company’s businesses. When the company grows and makes profits from its business, its value and the share price increase. The share price can also rise or fall over time depending on the particular stock forces of supply and demand and due to other prevailing factors in the economy. You can buy shares when the price is low and hold to sell later when the price goes up. The difference between the stock face value, which is the price you had bought it for, and the current share price is your profit.
A dividend is an optional payment that some companies pay to their stockholders as a way to attract and retain investors. It acts as a distribution of a portion or a percentage of the corporate earnings from their investments to their stockholders. The dividend payout is usually decided by the Board of directors and paid out depending on the particular class of the shareholders. It can be issued to the investors as cash, a share of stocks or property. In most cases, dividends are paid out by companies that are large and well established and have a stable source of income. Examples of such companies in America include Coca-Cola, McDonald's, Wal-Mart, Microsoft, among others. Dividends payment is constant and acts as a regular source of income for investors even in the event that the stock price decreases.
3. Tax Benefit
Another way to benefit from a stock investment is from the tax incentives. There are many tax breaks for investors that are offered by the US tax code. When you sell an asset that you own like your house, land, bonds, stocks, mutual funds units, debentures and more, the money you make is a capital gain. A long-term capital gain is subject to a federal tax which is a 15% tax rate for those in 25-35% tax brackets and 20% for those in the top tax bracket of 39.6%. Whereas the ordinary dividends are taxable as ordinary income, the qualified dividends such as those paid on corporate stocks earnings are subject to federal taxation of up to 20%, 15%or 0% depending on your tax bracket; which is lower than the tax on ordinary income. You can also benefit from rollover capital gains when you are an angel investor which you gain if you sell a small company stock to invest in yet another small business stock. The tax that is charged on your earnings from your stock investments can be reduced by investing through a retirement account. There are different retirement accounts that you can opt for to get the tax break. Your taxable income decrease when you invest through a retirement account.
Investing in stocks has various downsides but it can be quite lucrative if you take calculated risks. Remember, the higher the risk the higher the returns and vice versa.