How you make money from stocks

You make money from stocks in two ways: dividends and capital gains. Dividends are cash payments some companies send to shareholders, usually quarterly. Capital gains happen when you sell a stock for more than you paid for it. Most people focus on capital gains — buying low and selling high — but dividends provide steady income without selling.

The catch is that stock prices move unpredictably in the short term. A stock you buy today might be worth less tomorrow. Over longer periods — five years or more — the overall trend of the stock market has historically moved upward, but that is not may provide. You can lose money if you sell during a downturn or if a company fails.

How much you earn depends on which stocks you choose, when you buy and sell, how long you hold them, and how much you invest. There is no formula that works for everyone. Someone who bought technology stocks in 2010 and held them made substantial gains. Someone who bought the same stocks in 2021 and sold in 2022 lost money.

Key Takeaways

  • Dividends are cash payments from companies to shareholders, while capital gains are profits from selling a stock for more than you paid.
  • Stock prices fluctuate daily, and you can lose money if you sell when prices are down or if the company performs poorly.
  • Historically, the stock market has trended upward over decades, but past performance does not may provide future results.
  • You need a brokerage account to buy stocks, and you pay taxes on both dividends and capital gains.
  • Starting with index funds or exchange-traded funds (ETFs) spreads your money across many companies and reduces risk compared to picking individual stocks.

Opening a brokerage account

You cannot buy stocks directly. You need a brokerage account — an account with a firm that executes trades on your behalf. Common brokerages include Fidelity, Charles Schwab, E*TRADE, and Vanguard. Many also offer retirement accounts like IRAs, which have tax advantages for long-term investing.

Opening an account takes 10 to 20 minutes online. You provide your name, address, Social Security number, and employment information. The brokerage verifies your identity and approves you. You then link a bank account and transfer money into the brokerage account. That money sits there until you use it to buy stocks.

Most brokerages charge no commission to buy or sell stocks anymore, though some charge for certain types of trades or accounts. Read the fee schedule before you open an account. Some brokerages also offer educational resources and research tools that vary in quality.

Dividends: steady income from stock ownership

Not all stocks pay dividends. Mature, profitable companies — often in utilities, banking, and consumer goods — tend to pay them. Younger or faster-growing companies typically reinvest profits into the business instead. A company's dividend yield is the annual dividend divided by the stock price, expressed as a percentage. A stock trading at $100 that pays $2 per year has a 2% yield.

Dividends are usually paid quarterly, though some companies pay monthly or annually. You receive the payment in your brokerage account as cash. You can spend it, reinvest it to buy more shares, or leave it sitting. Many brokerages offer dividend reinvestment plans (DRIPs) that automatically buy new shares with your dividend payments, compounding your gains over time.

Dividends are taxed as income in the year you receive them, even if you do not sell the stock. The tax rate depends on how long you have held the stock and your income level. Long-term dividends (from stocks held over a year) are taxed at lower rates than short-term ones.

Capital gains: profit from selling stocks

A capital gain is the difference between what you paid for a stock and what you sold it for. If you bought 100 shares at $50 each ($5,000 total) and sold them at $75 each ($7,500 total), your capital gain is $2,500. You owe taxes on that gain in the year you sell.

The tax rate depends on how long you held the stock. Short-term capital gains (stocks held under one year) are taxed as ordinary income at your regular tax rate. Long-term capital gains (stocks held over one year) are taxed at lower rates — 0%, 15%, or 20% depending on your income. This is why many investors hold stocks for at least a year before selling.

You can also use losses to offset gains. If you sold one stock for a $1,000 gain and another for a $600 loss, you owe taxes on only $400 of gain. This strategy, called tax-loss harvesting, can reduce your tax bill if you are actively trading.

Starting with index funds and ETFs instead of individual stocks

Picking individual stocks requires research and carries higher risk. If you choose poorly, that stock might underperform or fail. Many beginners do better starting with index funds or exchange-traded funds (ETFs), which hold dozens or hundreds of stocks in a single investment.

An index fund tracks a market index — a group of stocks chosen by a set rule. The S&P 500 index includes 500 large U.S. companies. A fund that tracks it buys all 500 stocks in the same proportions. When you buy one share of that fund, you own a tiny piece of all 500 companies. If one company fails, it barely affects your return.

ETFs work the same way but trade like stocks — you can buy and sell them during market hours. Index funds are typically bought and sold once per day after the market closes. Both charge annual fees (called expense ratios), usually between 0.03% and 0.20% for broad index funds. That means for every $10,000 invested, you pay $3 to $20 per year.

Over the long term, most professional stock pickers do not beat the overall market return. Starting with a low-cost index fund gives you broad exposure, lower fees, and less work than researching individual companies.

Risk and the importance of time horizon

Stock prices move based on company performance, economic conditions, interest rates, and investor sentiment. In any given year, the market can rise or fall sharply. The S&P 500 has had negative returns in roughly one out of every four years historically. If you need your money in one year, stocks are risky because you might be forced to sell during a downturn.

Over longer periods, the risk decreases. Investors who held stocks through the 2008 financial crisis and the 2020 pandemic saw their money recover and grow if they did not sell. The longer you can leave money invested, the more time it has to recover from downturns and benefit from upswings.

This is why stocks are often recommended for retirement accounts and long-term goals (five years or more), but not for money you need soon. If you are saving for a house down payment in two years, bonds or savings accounts are safer choices.

How much you need to start

Most brokerages have no minimum deposit to open an account. You can start with $100, $500, or any amount. However, some investments have minimums — certain mutual funds require $1,000 or $2,500 to buy. Index funds and ETFs typically have no minimum beyond the price of one share, which might be $50 to $200 depending on the fund.

Starting small is fine. Many investors begin with $500 or $1,000 and add money regularly over time. Investing the same amount every month (called dollar-cost averaging) reduces the risk of buying everything at market peaks because you buy more shares when prices are low and fewer when prices are high.

The key is starting early and staying consistent. A 25-year-old who invests $200 per month until age 65 will have far more than a 45-year-old who invests $500 per month for 20 years, assuming similar returns. Time in the market matters more than timing the market.

Frequently Asked Questions

Can I lose more money than I invested in stocks?

No, not with regular stocks. The worst case is that the stock price falls to zero and you lose your entire investment. You cannot owe money to the brokerage. However, if you use margin (borrowing money from your broker to buy stocks), you can lose more than you invested because you owe the borrowed amount back.

Do I have to pay taxes on stocks I do not sell?

You do not owe taxes on unrealized gains — the increase in value while you still own the stock. You owe taxes only when you sell (capital gains) or when you receive dividends. This is why some investors hold stocks for decades without paying taxes until they need the money.

What is the difference between stocks and mutual funds?

A stock is ownership in one company. A mutual fund or ETF is a collection of stocks (or bonds) managed as a single investment. Mutual funds are actively managed by professionals who try to beat the market; index funds are passively managed and simply track an index. ETFs are similar to index funds but trade like stocks.

Should I invest in individual stocks or index funds?

Index funds are lower-risk and require less research, making them better for most beginners. Individual stocks offer higher potential returns but also higher risk and require more time to research. Many investors use both — a core holding in index funds plus smaller positions in individual stocks they believe in.

How do I know when to sell a stock?

This depends on your strategy. Some investors sell when a stock reaches a target price. Others sell when the company's fundamentals change or when they need the money. With index funds, many investors hold for decades and never sell. Avoid selling during market downturns out of fear — historically, that locks in losses.