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The way I thought stocks worked was like this:

  1. You buy them.
  2. You wait for years or decades.
  3. At some point, you sell them and then they may be worth a lot more, so you gain money.

Thus, they are technically worthless as long as they are "held". You only get the "benefit" when actually selling them, except for the feeling of knowing that you can do that.

But then there are apparently stocks that will regularly send you money for simply owning them. That is, you don't lose any of the stocks/shares, but you get money sent to you for "free", simply because you own the stocks.

Is this common or uncommon? Why would a company want to give away money like that if they don't have to?

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    Have you come across the concept of dividend-paying stocks? Some stocks pay dividends quarterly, or semiannually, or annually. Some pay occasionally; some start paying dividends on a regular basis after years of no dividends whatsoever. Mar 8 at 16:29
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    They are not worthless as they are held any more than any other asset. Would you consider cash in your pocket as worthless until you spend it?
    – JohnFx
    Mar 8 at 17:20

3 Answers 3

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Yes, it is common, and historically was the primary reason to hold stocks at all. The process you're describing is the price appreciation component of stock returns, where your return is based on buying the stock at a low price and selling it at a high price. The other component of returns however are dividends, which are cash payments to shareholders.

When you own a stock, you are owning a piece of the company, and as such are (roughly speaking) entitled to the assets of that company. That includes profit, and any profit that is not retained by the company should be paid back to the shareholders in the form of a dividend, as incentive to own the stock.

In today's environment, the most famous stocks, (Google, Tesla, Amazon, etc.) are growth companies who make the argument that investors will be better off if the company retains all of their earnings in order to expand, leading to more price appreciation. More mature companies take the opposite approach, focusing on steady earnings to pay a healthy dividend, and are classified as value stocks, with the most reputable being known as Blue Chip Stocks(Think Coca-Cola).

If you are looking to introduce more dividend paying stocks in your portfolio, you may look for some with the highest Dividend Yield.

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There are stocks that pay dividends, but they are not "free". The stock price is based on the value of the company, and when the company pays out cash in dividends, the value of the company, and thus the value of the stock, goes down by that amount. For example, instead of having $100 in stock, after a $5 dividend you'd have $95 in stock and $5 in cash. So your total wealth is the same. You need the value of the stock to go up (because the value of the company is going up) more than the dividend to make up for it.

Why would a company want to give away money like that if they don't have to?

It's a way for companies to give return to shareholders without forcing them to sell their shares. It is more common on mature companies that have less growth potential, so that shareholders can invest their share of the earnings in other things that may make more return.

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Why would a company want to give away money like that if they don't have to?

The short answer is, they do have to in order to raise the initial funds - or certainly, this was a historical expectation.

Investors are willing to give money to the company due to an expectation of getting more money back in future. If the company never pays dividends, then all of the investor's returns are unrealised capital gains (i.e. increased "share price"). The investor wouldn't be able to access this money without selling - and there may well be costs and liquidity issues associated with selling (especially true in the past). If you wanted a steady income from an investment, it would be awkward to have to sell a portion of your shares each month.

Additionally - the company isn't giving away money. All of the company's money (and other net assets) already belong to its shareholders. All of the profit is already economically theirs. The only question is whether it gets returned to them immediately, or whether the company holds onto it to invest it on the shareholders' behalf (and hopefully make even more profit from doing so). Ultimately there will come a time when the company has no obvious ways to use cash to expand; at which point, it ought to return those profits to shareholders so that they can make use of them.

If anything, your question is the wrong way round. Returning profits to shareholders should arguably be considered the default; companies should only retain them for investment if they can reasonably see a way to turn them into even more money for those shareholders.

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