Most Americans do not truly understand how income is generated from the purchasing of stocks. There are two ways to make money from stocks, Through capital gains or when the stock price increases, and from dividends.
For example: Suppose I buy company X for $1.00 per share and it increases to $10.00 per share. I have just made 9.00 per share. But wait, say company X pays $2.00 per share in dividends per year. I have just actually made $8.00 in capital gains plus $2.00 per share in dividends. My yearly profit would be $11.00 per share. Some people only invest in a stock for dividend return. They usually look for Real Estate Investment Trusts or (REITS). REIT can have a dividend yield of up to 18% per year.
There are also three type of investors. Financial advisors must determine the type of investor they are working with in order to find the best investment strategy. The three type of investors are Risk Adverse, Risk Loving, and Risk Neutral.
Risk Adverse investors can’t stand to lose any money on investments. They would most likely be upset if they lost a small amount of money on an investment. Their best investment would be a Utility Stock or a Treasury Security.
Risk neutral investors do not worry about gaining or loosing money. They will take more risk than risk adverse investors
Risk Loving investors are aggressive, they will usually seek investments with high returns but have a higher default risk. They are similar to venture capitalists and are willing to accept highly uncertain investments that will show a potential for returns. They usually like Initial Public Offerings of newly listed stocks, or potentially pink sheet stocks with high gain potential but equally high bankruptcy risk. An example of a stock a risk loving investor might seek out would be XROX or AMC. These are two penny stocks with high risk but could have great return potential.
Truthfully a stock purchase is determined by the investor. Some people buy stocks because they like the company. Others buy stock because of the numbers, and finally some just buy stock for the dividend return.
Economic and Finance 