Question
2.3.3 Use the source and your own knowledge to explain how people made money from investing in shares/stocks.
Ask by Santiago Hill. in South Africa
Mar 25,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
People make money from investing in shares by selling them at higher prices (capital gains), receiving regular payments from companies (dividends), holding them long-term to benefit from company growth, timing the market to buy low and sell high, diversifying investments to reduce risk, and through corporate actions like stock splits and buybacks.
Solution
To explain how people made money from investing in shares/stocks, we can break it down into several key concepts:
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Capital Gains:
- When an investor buys shares at a certain price and later sells them at a higher price, the difference between the selling price and the purchase price is known as a capital gain. This is one of the primary ways investors make money in the stock market.
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Dividends:
- Some companies distribute a portion of their profits to shareholders in the form of dividends. Investors can earn money through these regular payments, which can provide a steady income stream in addition to any capital gains.
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Long-term Investment:
- Many investors adopt a long-term strategy, holding onto their stocks for several years. Over time, the value of the shares may increase significantly due to the company’s growth, leading to substantial capital gains when sold.
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Market Timing:
- Some investors attempt to buy stocks when they are undervalued and sell them when they are overvalued. This requires a good understanding of market trends and company performance, but successful timing can lead to significant profits.
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Diversification:
- By investing in a variety of stocks across different sectors, investors can reduce risk and increase the potential for returns. If one stock performs poorly, others may perform well, balancing the overall investment portfolio.
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Stock Splits and Buybacks:
- Companies may perform stock splits, which can make shares more affordable and potentially increase demand. Additionally, when companies buy back their own shares, it can reduce the number of shares available, often leading to an increase in share price.
In summary, people make money from investing in shares/stocks through capital gains, dividends, long-term investment strategies, market timing, diversification, and corporate actions like stock splits and buybacks. Each of these methods can contribute to an investor’s overall return on investment.
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Simplify this solution Extra Insights
Historically, investing in shares traces back to the 16th century where merchants sought funds for trading expeditions. They would sell shares in their voyages, promising a return based on the profits. This system blossomed into stock exchanges where people could buy and sell shares of companies, turning investing into a popular way to build wealth over time.
In today’s world, people make money from stocks mainly through capital gains and dividends. When you buy shares at a lower price and sell them at a higher price, the difference is your profit—also known as capital gain. Additionally, many companies distribute a portion of their profits as dividends, providing investors with a steady stream of income, all while they hold on to their shares!
