The three ways to make money from stocks

You make money from stocks in two main ways: selling them for more than you paid, or collecting dividends if the company pays them. A third option — borrowing against your stocks — lets you access cash without selling, though it carries real risk.

Selling at a profit is the most common route. You buy 100 shares at $50 each, the price rises to $75, you sell, and you pocket the difference. The profit is called a capital gain. If you hold the stock for more than a year before selling, the tax on that gain is usually lower than if you sell sooner.

Dividends are payments some companies make to shareholders, usually quarterly. If you own 100 shares of a company that pays a $1 annual dividend, you receive $100 per year whether the stock price moves or not. Not all stocks pay dividends — many growth companies reinvest profits instead of paying shareholders.

Key Takeaways

  • Selling stocks for more than you paid generates a capital gain, which is taxed differently depending on how long you held the stock.
  • Dividends are cash payments some companies make to shareholders, usually four times per year, and you receive them as long as you own the stock.
  • You can borrow money using your stocks as collateral through a margin loan, but if the stock price falls, you may be forced to sell at a loss.
  • The tax you owe on stock gains depends on whether you held the stock for more than one year and on your total income that year.

Selling stocks and paying tax on the gain

When you sell a stock for more than you paid, you owe tax on the profit. The amount of tax depends on two things: how long you held the stock and your total income for the year.

If you held the stock for one year or less, the gain is taxed as short-term capital gain, which means it is taxed at your ordinary income tax rate — the same rate as your salary or wages. If you held it for more than one year, it is a long-term capital gain, and the tax rate is usually 0%, 15%, or 20% depending on your income bracket. Long-term rates are almost always lower.

Your brokerage account will report the sale to the IRS on Form 8949 and Schedule D. You do not have to calculate the tax yourself — your tax software or accountant will do it — but you do need to know that the gain is taxable income. If you sell at a loss, you can use that loss to offset gains from other sales, or up to $3,000 of ordinary income in a single year.

Collecting dividends without selling

Dividends arrive in your brokerage account automatically if you own the stock on the ex-dividend date, which is the date the company sets as the cutoff for who receives the payment. You do not have to do anything — the dividend is deposited, and you can leave it there, spend it, or reinvest it.

Dividend income is also taxable. If the dividend comes from a U.S. company and you held the stock for more than 60 days around the ex-dividend date, it is taxed as may have access to dividend income, usually at the same favorable rates as long-term capital gains. If you do not meet the holding period, it is taxed as ordinary income. Your brokerage sends you a Form 1099-DIV each January showing all dividends you received.

Some investors use a strategy called dividend reinvestment, where dividends are automatically used to buy more shares of the same stock. This compounds your ownership over time, but the dividends are still taxable in the year you receive them, even though you did not take the cash.

Borrowing against your stocks with a margin loan

A margin loan lets you borrow money from your brokerage using your stocks as collateral. If you own $50,000 in stocks, you might borrow $25,000 at an interest rate set by the brokerage — typically 6% to 12% depending on the amount and current rates. You can use the cash for anything: to buy more stocks, to pay a bill, or to invest elsewhere.

The danger is that if your stocks fall in value, the brokerage can force you to sell stocks to repay the loan. If your $50,000 in stocks drops to $40,000, and you borrowed $25,000, the brokerage may issue a margin call demanding you deposit more cash or sell stocks immediately. If you cannot, they sell your stocks at whatever price they fetch, locking in your loss.

Margin loans are not a casual tool. They are useful for short-term cash needs if you are confident your stocks will hold their value, but they turn a decline in stock price into a forced sale. Most new investors should avoid margin borrowing until they understand the mechanics and have substantial cash reserves.

Understanding capital gains tax brackets

Long-term capital gains tax rates depend on your total income for the year, not just the gain itself. The IRS sets three brackets: 0%, 15%, and 20%. A single filer in 2024 pays 0% on long-term gains up to roughly $47,000 of income, 15% on gains between $47,000 and $518,900, and 20% on anything above that. These numbers change each year and are different for married filers and heads of household.

This means the tax on your stock sale depends on your other income that year. If you are retired with little income, your long-term gains may be taxed at 0%. If you have a high salary, the same gain is taxed at 15% or 20%. Some investors time large sales to years when their income is lower to reduce the tax bill.

Short-term gains have no special brackets — they are taxed at your ordinary rate, which can be as high as 37% for high earners. This is why holding stocks for more than a year usually saves money on taxes.

Selling stocks in a taxable account versus a retirement account

If you own stocks in a regular brokerage account, every sale and every dividend is taxable in the year it happens. If you own stocks in a retirement account like a 401(k) or IRA, the tax is deferred or eliminated entirely.

In a traditional IRA, you do not pay tax on gains or dividends while the money is in the account. You pay tax only when you withdraw money in retirement. In a Roth IRA, you pay no tax on gains or withdrawals ever, as long as you follow the withdrawal rules. In a 401(k), the same deferral applies — no tax until you withdraw.

This is why retirement accounts are powerful for long-term stock investing. You can buy and sell stocks inside the account without triggering a tax bill each year. The downside is that you cannot access the money before age 59½ without penalties in most cases. For money you need sooner, a taxable account is necessary, and you simply plan for the tax bill when you sell.

What happens when you inherit stocks

If you inherit stocks from someone who died, you receive a step-up in basis. This means the cost basis of the stock is reset to its value on the date of death, not the price the original owner paid. If your parent bought a stock for $10 and it was worth $100 when they died, your basis is $100. If you sell it the next day for $100, you owe no capital gains tax.

This is a significant tax advantage that applies only to inherited assets. It does not apply to gifts — if someone gives you a stock while they are alive, you inherit their original cost basis. Understanding this distinction matters if you are planning to give stocks to family members or if you are inheriting them.

Frequently Asked Questions

Do I have to sell all my shares at once, or can I sell some and keep the rest?

You can sell any number of shares at any time. Many investors sell a portion of a position to lock in gains while keeping some shares for future growth. Your brokerage tracks which shares you sold and calculates the gain on those specific shares.

What if I sell a stock at a loss — can I use that to reduce my taxes?

Yes. You can use capital losses to offset capital gains from other sales. If you have no gains, you can deduct up to $3,000 of losses against ordinary income in a single year. Losses beyond that carry forward to future years. This is called tax-loss harvesting and is a common strategy to reduce your tax bill.

If a company pays a dividend, do I have to take the cash or can I reinvest it automatically?

You can set up automatic reinvestment so dividends buy more shares instead of sitting in cash. However, the dividend is still taxable income in the year you receive it, even though you did not take the cash. Check with your brokerage about how to set this up.

Can I borrow money against my stocks if I have only a small amount?

Most brokerages require a minimum account balance — often $2,000 to $5,000 — before they allow margin borrowing. Even then, you can typically borrow only a percentage of your account value, usually 50%. Check your brokerage's margin requirements before assuming you can borrow.

What is the difference between a dividend and a capital gain?

A capital gain is profit from selling a stock for more than you paid. A dividend is a payment the company makes to shareholders while you still own the stock. You can have both: collect dividends while holding the stock, then sell it for a gain later.