How do shares make money?

Intro

This lesson looks at how shares make money, and covers the topics:
- capital gains
- dividends
- taxIt should take about 8 minutes to complete.

The legal bit

The information on this website is a starting point - we've linked to more information (and how to contact professional advisors) throughout the lessons if you need to know more.This is not investment, financial or tax advice.We try to make sure that information on the website is accurate and free from errors. However, to the maximum extent provided by law (but subject to your rights under the Consumer Guarantees Act), Aptitude and its personnel:
- Do not make any representations, or give any warranties, that the information is accurate, free from errors or is suitable for you.
- Do not accept any liability to you whatsoever (and however arising) for any loss or damage you incur in connection with the contents of, or your use of any of information contained in, the website.Aptitude is the trading name of Ninja Orange Ltd in relation to these lessons.

Start

How do shares make money?

Shares make money in two ways - by distributing company profits to shareholders (dividends) or by continuing to grow the company, and making the existing shares worth more when you sell them (capital gain).You will lose money if you sell your investment for less than you paid for it.

Dividends

A dividend is a payment made to shareholders as a way of sharing profits. Dividends are usually paid out once or twice a year, and are usually written a payment of cents per share.Payment of a dividend doesn't effect the number of shares you own.

If the company decides to reinvest its profits in the business, that may reduce your dividend, or there may not be one at all. The company directors are responsible for making that decision.Some shares don’t pay dividends at all - so if you’re looking for regular income, check if the company has a dividend policy before you buy.

Capital gains

A capital gain is the money you make if you sell your shares for a higher price than you paid. If you have invested in a company that does well and continues to grow, the value of your shares will likely grow too.If you have invested in a company that is not performing well, or there is a market downturn at the time you want to sell your shares, you may make a loss.If the company closes down, you may lose your investment entirely.

Tax

If you are being paid dividends, the company may also attach imputation credits or deduct dividend withholding tax, both of which pre-pay tax on your behalf.The rules around capital gains are a little more complex, so it is important to get professional advice on how to account for them.

More information

You can read more about how shares make money in this Sharesies blog post.And sorted.org.nz covers this and many other elements on its investing in share page.

Quiz

1. If the market price of your shares goes up, you have made a...