How to Make Money in Stocks: The Spread & Dividends Explained

There are two primary ways that you can make money by purchasing stock.

You might be asking, what is stock? Stock is a term used to refer to a share of ownership of a public company.

All companies that operate are not listed on stock exchanges. Those are private companies that are not listed. Companies that are listed on these exchanges get the term public. They're known as public companies, meaning that anyone in the public can purchase a bit of ownership of that company through a brokerage account.

Ownership of the company has its perks. One of the perks is what's called the spread or the game.

1. The Spread

Let's talk about the first way that you can make money, the

spread. The best way to explain the spread is through an example. Say someone decided to buy one share of ABC Company for $10.

They hold on to that one share of stock they purchased for $10. For the next 20 years, the company has gone up and down in price or value of their company on the exchange.

Twenty years later, it's worth $100 per share. As the owner of that share of stock in ABC Company, you can now go to your brokerage firm or wherever you're buying and selling shares and sell that one share you purchased for $10. Now that you're selling it at $100, the spread is $90. That $90 is what you get to keep as a person who owned a piece of that company.

That is the primary way you hear about people making money by purchasing stock. Your actual gain or loss is not ever realized until you sell the stock.

One thing to keep in mind about selling stock is that there is no penalty involved, but there are taxes as usual. The taxes applied to the sale of stock are called capital gains tax in the event you earn money through that sale. Gains and losses are not realized until you sell.

So, in this case, you earned $90. If you've held it longer than one year, you will still have a tax responsibility, but it won't be the same as if you sold it before one year of having the stock.

You are taxed more heavily if you sell a stock within one year of purchasing it. It's great to make money, but be aware of the tax implications.

2. Dividends

The next way to earn money through owning stock is through a dividend. Dividend is a word used to refer to the money that you can make by holding stock or having ownership in a company.

We already talked about how you can make money on the sale of the stock, but while you're holding the stock, meaning you haven't sold it yet, you could be getting quarterly, monthly, or yearly dividends.

Big money is usually made in the sale of stock, but it's also nice to get a little bit of money regularly. It's a great way to sit back and earn extra income. Some companies do not pay dividends at all. It's really up to the company and what they decide to do with their revenue and profits.

Some people use dividend earnings as an entire portfolio strategy. They purchase stock from companies that consistently pay dividends and live off dividend money.

However, it usually takes quite a bit of investment to get to the point where you can live off the dividends. Dividends do not usually involve a lot of money, but it's a good strategy for some.

DRIP Dividends

Another fun concept about dividends is what's called DRIP. DRIP stands for dividend reinvestment plan.

For example - you own one share of ABC company. Because you own that one share every month, ABC company decides to pay a dividend. Say you get paid one dollar as a dividend from your ownership in their company.

Instead of just saying, great, I'll take that dollar off your hands and spend it; you can reinvest it or put it right back into buying more shares of ABC Company. You could see how over time, along with any additional contributions you make, this one dollar of a dividend every month could help you gain a lot more stock.

This is especially valuable when you sell the company stock, assuming the company goes up in price.

How to make money in stocks

Having ownership in a company by way of stock is a great way to start making money. Knowing how to make money in stocks and using dividends can help you get on the road to financial security. It's one of my favorite things to do, and I hope that breaking it down into simple terms makes it easy to understand.

For more advice on investing for beginners, see my previous tutorial on how to start investing in a 401k.