How Do You Make Money Off Of Stocks That Don't Pay Dividends?

I am confused about how people make money off of stocks that do not pay any dividends. This is the way I think of it.

Buying a stock is really buying a part of a company. So let's say there are 100 stocks of a company that makes 1 million a year in profit. Now let's suppose I purchase 10 out of the 100 available stocks, which is 10% of the company.

Okay so from that initial investment, you would suppose that I would be entitled to 10% of the profit - seeing as how I own 10% of the company. Of course some of the profit has to be reinvested into growth.

But... What I don't understand is how anyone makes money off of companies that don't pay out any money. Its like I own 10% of a company that never gives me a return on investment and the only way to profit is to sell it to some poor shmuck who will buy it for a higher price.

How do I make money off of buying stock in a company that never gives me a return on my investment except through selling it to some other poor sucker?

Yes, if the stock doesn't pay a dividend, then the only way that it pays to own the stock is to sell it for more than you paid for it. But why does that make the buyer a sucker?

If the company is small and growing -- and of course as a stockholder you want it to grow -- it's perfectly reasonable for it to retain 100% of the earnings for growth and pay 0% dividends...for now.

However, I will agree with you to this limited extent: There are mature, stable, slow-growing companies that make a healthy profit that really should be paying dividends, and don't. If they did, their stock price would probably rise.

You make money by buying low and selling high.

Ordinary investors never get to buy 10 percent of a company. Most of the publicly traded companies are much too expense and valuable to do that.

When you buy a stock you are buying an ownership interest. The total value of the company depends on many factors: the cash that is generated, the growth of the company, the success of new products, the expected value of the total company ten years from now, etc. The price of the stock goes up or down every day based on company news, the economy, news from competitors,etc.

Some of the stocks with the biggest price movements are ones that don't pay any dividends.

if you own such a large portion (10 percent) then a good way to make money is to sell it and watch the stock price go down and then buy the stock when its lower and sell it when its high and repeat (cuz selling 10 percent of a company;s stock will have a big impact on the stock price)

A very good question actually. I think the reason a company that does not pay dividend is if it can use the earning for growth. When the company becomes mature (no meaningful growth), it will usually start to pay dividend. Selling shares for profit will work as long as there are others who will take the shares from you..isn't it comforting to know? Just don't get suckered into investing in a hollow company that has no real future..but that's the hardest trick!

Well, if a company feels they can get a higher rate of return on the profits they generate each year, they'll plow 100% of it back into the business.

But there are other ways to make money - namely, selling options against your stock position. So let's say I own 100 shares of Google, I can sell someone a "Call option" (a contract giving them the right to buy those 100 shares from me at a specified price in the future - usually higher than where it is). So I collect the money for selling them the call option contract, and if the stock stays flat, I keep the stock too, thus earning income while still holding the stock.

If you need more detailed information on strategies like this I recommend checking our another Investing Q&A site: http://www.tickerhound.com

Best,
John