Not all stocks pay dividends, which is fine as long as the stock appreciates in value. Unfortunately, this is not always the case. Holding onto stocks over the long-term and hoping for the best keeps many investors up all night. You can be a long-term investor and realize a gain on your investment, or you can actively trade the stock to make money off of its daily price movements, which is called day trading.
Some investors seek companies that pay dividends, as this is a source of additional income. However, ultimately, when you buy a stock you are hoping to purchase it at a low price, sell it later at a higher price and make money on the difference. This is called a capital gain; you can make money on a stock that doesn't pay dividends from capital gains.
Investing in stocks is risky. You have the potential for making unlimited profit or your investment could become worthless. In addition, stocks fluctuate daily, and the advent of technology and securities regulation changes makes it possible for small investors to capitalize on these daily stock price movements. A day trader is an investor who makes money by trading stocks over a very short time horizon, in some cases, seconds. A trader can realize a capital gain in a matter of minutes and not have to concern himself whether a stock pays a dividend or not.
Long-term investors practice a buy and hold strategy, hoping that the share price increases over time. However, investors can also make money on a stock when the price declines in a practice called "shorting" the stock. In a typical short transaction, an investor borrows money from his broker to acquire a stock at a high price. When the price of the stock declines, the investor repurchases the shares at a lower price, making money on the difference. For example, an investor shorts 100 shares of a stock at $75. The stock price drops to $40 per share. The investor makes a capital gain of $3,500.
Call and Put Options
A derivative is a financial instrument that derives its value from an underlying asset. Options are one form of derivative instrument that a trader can use for speculative purposes. A call option is a contract that gives you the right but not the obligation to buy a stock, while a put option gives you the right but not the obligation to sell a stock. Writing call or put option means that you are selling an options contract. The purchase price of the option is called a premium. Thus, another way to make money on stocks is by writing call and put options to receive a premium from the options buyer. However, writing option contracts is risky. The call or put option can become worthless to the buyer, referred to as being "out of the money." However, a call or put option that is "in the money" means you'll have to fulfill the contract.
Investing in a stock whether you do it as a long-term investor or day trader is risky. An adverse price movement can wipe out your investment or your trading account. Investing in stocks that pay dividends provide an offset to stock price fluctuations and is a way for investors to earn income. Therefore, the total return on dividend stocks is the capital gain plus the dividends you receive over the holding period.
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