How Stocks Make Money and How You Can Benefit

Mohit Oberoi, CFA - Author

Aug. 6 2020, Updated 7:20 a.m. ET

Over the long term, stocks may be a better investment than other asset classes such as debt and gold. Berkshire Hathaway chairman and legendary investor Warren Buffett has talked at length on how investing in stocks can create long-term wealth.

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How do you make money from stocks?

An investor makes money from stocks in two ways: when a company rewards shareholders, and when the investor sells stocks. Companies can reward shareholders in many ways. In the simplest form, companies declare dividends that are then paid to all eligible shareholders. Along with dividends, companies can also offer shares at a discount to eligible shareholders. Franco-Nevada, for example, has a dividend reinvestment plan where shareholders can buy stocks at a discount in lieu of receiving a dividend.

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However, the biggest returns from stocks come in the form of capital gains. Capital gains are the difference between a stock’s buying and selling prices. For example, if you brought a stock at $100 and sold it at $300 five years later, your capital gain would be $200. And in this example, if you received an annual dividend of $5 for three years, your total return would be $225. 

The best stocks to buy now

This is a more subjective question. There's no set definition of "the best stocks"—what's best depends on your risk appetite and investment strategy. If you're a value investor, Berkshire Hathaway stock may be a good stock to buy. Although Buffett underperformed the S&P 500 by 20 percent in 2019 and the first half of 2020, the Oracle of Omaha might return to his winning ways soon. 

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Value investors can also look at banking stocks. Recently, Berkshire Hathaway increased its stake in Bank of America. Banking stocks have been out of favor with markets, but might be a contra bet. While banks have suffered due to concerns over rising provisions, they reported strong trading income in the second quarter.

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If you're a growth investor, there are several good stocks to buy. In the electric vehicle space, NIO looks well placed. The company reported strong sales in July and after a series of capital raise transactions, its balance sheet looks better. Tech giants Microsoft and Amazon also look like good bets for the long term. U.S. tech stocks have risen sharply this year amid the coronavirus pandemic.

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How to make money from home

The internet is full of offers on how to make money from home. Whereas many of those offers are unfortunately fraudulent, investing in stocks can be a legit way to accomplish this. You can start investing online through a broker of your choice. It's key to note, however, that stocks tend to deliver the highest returns over the long term, but can see short-term volatility.

To protect yourself, you need to follow a disciplined strategy of applying stop losses and booking profits. Also, while using leverage can amplify your trading returns, it can magnify your losses if the trade doesn't go as expected. You can also make money from home by investing in stocks with high dividend yields.


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