Stock market trading can be alluring, especially to new investors hoping to build some income. When investing in stocks though, how exactly do you earn money?

Stockholders generally earn money in one of two ways:

1.    They are paid dividends regularly or periodically (portions of a company’s profit paid directly to shareholders).

2.    They earn capital gains by selling those shares of stock for a higher price than they paid when purchasing them (they profit from the buying and selling of stocks).

When you get involved in stock trading, you’ll need to make a decision to invest in growth stocks or dividend-bearing stocks, or a combination of the two.

Dividend-Bearing (Income) Stocks

These are the stocks that will generate income for you while you actually own the shares. For example, a company might review profit quarterly, keep a certain amount as a cushion to cover future operating costs, and then pay the rest of those profits to shareholders as dividends. How much you earn in dividends depends on how many shares you own.

It is important to note that not all dividend-paying stocks pay dividends regularly. They may only pay out when profits reach a certain dollar amount for instance. Each company is different.

The perk of dividend-earning stock is that you earn money without having to sell, and you can earn over a prolonged period of time. The downside is that dividends may always stop, and fewer profits being reinvested in the company means you may not see heavy growth (and the later increased sale prices often associated with it).

Growth Stocks

If you choose to invest in growth stocks, you go in understanding that you probably won’t earn money until you sell your shares. In many cases that involves investing in long-term growth stocks–stocks with a long history of steady growth and projections showing that growth is expected to continue. You might hold onto that stock for several years before selling it at its higher price.

While “growth stocks” generally refer to that long-term growth, you work under a similar principle by investing in value stocks. Rather than stocks on a long-standing upswing, these are stocks you consider undervalued (although not necessarily cheap).

To understand value stocks, think about purchasing a new mobile phone. Let’s say the latest model you have your eye on retails for $500. One day you see that same model being sold for $300 on a temporary sale. Purchasing it then wouldn’t make it a “cheap” buy, but it would be a value buy–you know the value (and future selling price) will go back up to $500, making that $300 a good deal.

When you apply that to stocks, you are often thinking about shorter-term investing. You find a stock you consider a bargain and purchase it with the expectation that market fluctuations will push its price up again in the foreseeable future. At that point you’ll sell for a profit, taking advantage of short-term growth.

The nice aspect of growth stocks is that you can earn a large lump sum payout. By having profits invested into growth instead of dividend payments, the value of the company is expected to increase over time. As its value grows, so does its share price.

On the other hand, growth stocks often require you to be a patient investor. If you can’t afford to have money tied up in long-term investments, you may be better off looking for shares with a strong track record of dividend payments. No single stock market trading strategy is right for every investor. Work with your stockbroker or financial planner to decide which type of potential earning model is right for you to pursue.

Popularity: 12% [?]