How do Stocks give you returns?
Everyone who enters into the stock market comes with only one motive in mind: To earn a decent amount of income/returns that is above normal bank returns. Some want to make quick money while some want to be patient and see their money grow over a period of time.
As a beginner, one would be curious to know about how the returns are generated, to which the answer is,
There are two ways by which stocks generate income:
1) The Market Value Appreciation of the share
2) Dividends paid by the company
1) Market Value Appreciation of the share price
When you buy a share of a company, it would be trading at some value. Over a period of time, the price of the share would change according to the performance of the company. Usually, one would buy a company which he expects to perform good in future. So, with good overall business performance of the company, the stock price also appreciates. For eg:
If a A had bought 100 shares of company XYZ Ltd. @ Rs 10/share and sells them at Rs 12/share in the next one month, then he would earn a profit of Rs 200 in a month. The profit earned is through the market value appreciation of the share price.
2) Dividend Pay-out
Dividend is an amount paid by a company (semi-annually or annually) to its shareholders from the profits of the company. A company may or may not pay dividends to its shareholders. The company uses the unpaid dividends for its future business activities. The company’s board of directors decide how much dividend has to be paid.
For eg: Hero Motororp paid two dividends (interim and final) during the year 2019. The dividends were of Rs 55 (interim) and Rs 32 (final) per share.
So these were the two ways where a retail investor can generate income through stock market.