Everyone keeps saying you should INVEST, but why? How does investing actually make you money? In this article I will explain how to invest to make money by investing in stocks. There are two main ways you can make money by investing in the stock market: (1) Capital Gains, (2) Dividends.
Recap: In my previous article you learnt the basics of investing,
Investing is when people invest in shares/stock of corporations in the hopes that the shares grow in value over time.
For an example, let’s say Apple Corporation (Apple) has 100 shares each valued at $10. If you buy 10 Apple shares, you now you own 10% (10/100 shares) of Apple. Next year, Apple makes a lot of money, and now their shares are valued at $20. Your 10 shares are now worth a total of $200.00 = (20*10). You just made $100 in one year!
1. CAPITAL GAINS:
But this $100, is NOT in cash. It is only the amount that your share increased. If you want to convert this $100 into cash, you need to SELL your stock. So if you sell it at $200, and you bought it for $100, you will make $100. This income from selling your shares is called a capital gain, and yes, it is also taxed.
Define: Capital Gains are the profit that you get from selling property, minus the cost to initally purchase it. (Capital Property can include shares/stocks or real estate).
Capital gains are GOOD because only 50% of the gain is taxed.
Using the same example, you have a capital gain of $100 when you sold your stock. So to calculate your gain is $100 * 50% that is taxable, and your tax rate (assume 30%).
2. Dividends:
Dividends are basically extra cash that a corporation has, where they give it out to people who have purchased its shares.
For an example: Apple made extra money this year, and decides to distribute a $1 dividend per share. If you own 10 shares, you receive $10 (1*10).
Dividends are also taxed, but usually at a lower rate than your employement income. If you want to learn in detail how dividends are taxed click here:
For this example lets assume a tax rate of 29%. Although this $10 dividend may not seem a lot, if every year you receive a dividend and reinvest it to buy even more shares, overtime you can make a lot of money!
Summary
So capital gains, and dividends are the two ways that you can make money investing. But as you can see, even by investing you still have to pay a lot of taxes. And thats when investment vehicles such as TFSAs and RRSPs come in handy.
The next article will show you how you can use a TFSA and RRSP to maximize your return on your investments!
How did you $85.00 for the remaining income???
Hi Brandon! So the total amount of money you get from selling the shares is $100, but only 50% ($50) of the $100 is taxable (since it is considered a capital gain).
So assuming a 30% tax rate, on $50 is $15 of tax you owe the government.
So the remaining income is $100 – $15 of taxes = $85.
Capital gains are good because only 50% of the proceeds are taxable. If it were employment income, the whole $100 would be taxed.
Hi Michael. This helped greatly. Thank you!