Q:

How do you make money on the stock market?

A:

Quick Answer

An investor in the stock market typically makes money when a stock he owns increases in price and when a company whose stocks he is holding issues a dividend. When a stock price rises, the investor only makes money if he sells the stock; otherwise, he remains with unrealized gains. A stock price typically increases because other investors believe it has a higher value than its current price.

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Full Answer

In some cases, an investor makes more money by compounding his returns. This means that he does not withdraw his dividends but ploughs them back to make more money. Compounding allows an investor to let his money make more money for him. An investor who wants to meet a long term target, such as growing his retirement nest egg, increases his chances in reaching his target more quickly by compounding his returns.

An investor who buys a stock actually buys the right to the profits generated by the company, but this does not mean that he always receives these profits. A company may decide to reinvest the profits for future growth or to conduct a share buy back. The long-term profits for an investor lie in the profits generated by the companies whose stock he owns as they grow their revenues and profits.

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