Benefiting from Stocks - dummies

By Joe Duarte

As a stock holder, you can benefit by receiving dividends and/or gains in the price of the stock. This often results when a company’s sales or profits increase, when new products or technologies are introduced, and other countless reasons. There are also approaches that allow you to benefit from downward moves in the stock.

Long stock

A long stock position is created by purchasing shares of stock in the market. Because stock can continue to exist indefinitely, it can continue to rise without limit. What ultimately happens is a function of the company prospects and general market conditions. So your potential reward with stock is unlimited, especially over very long periods of time.

Not all companies distribute profits in the form of dividends to stock holders. Many growth stocks retain profits to fuel continued growth. This trend can vary over time. Generally, when interest rates are very low, more companies tend to pay dividends, although this is not a hard-and-fast rule, and other variables may also influence dividend trends.

Short stock

You create a short stock position by reversing the standard stock transaction (long stock); you sell first with the expectations that the price of the stock will go down. In this situation you profit when you buy the shares back. You complete such transactions in a brokerage account that allows margin trading.

The rewards you reap for a short stock position are high, but limited. A stock can continue to decline, but only until it reaches zero. This is the downside limit that caps your rewards.

Call options increase in value when the underlying stock rises, whereas put options increase in value when the underlying stock falls.