How can an investor typically earn a return from investing in a company's stock?

• A. By receiving dividends and through increases in the stock's market price (capital gains)
• B. By redeeming the stock at its face value upon maturity
• C. By receiving guaranteed annual payments regardless of company performance
• D. By collecting interest payments from the company

Answer: (A)

Verified step by step guidance

1. Understand the concept of stock investment: When an investor buys a company's stock, they become a partial owner of the company. Their returns are tied to the company's performance and market conditions.
2. Identify the two primary ways an investor earns returns from stock investments: (1) Dividends, which are periodic payments made by the company to its shareholders from its profits, and (2) Capital gains, which occur when the stock's market price increases and the investor sells the stock at a higher price than the purchase price.
3. Clarify why the other options are incorrect: Stocks do not have a face value to redeem upon maturity, as they are not debt instruments like bonds. Additionally, stockholders are not guaranteed annual payments, as dividends depend on company performance and board decisions. Lastly, stocks do not pay interest; interest payments are associated with loans or bonds.
4. Explain the role of dividends: Dividends are typically distributed from the company's retained earnings and are a way for the company to share its profits with shareholders. Not all companies pay dividends; some reinvest profits back into the business.
5. Discuss capital gains: Capital gains are realized when the investor sells the stock at a price higher than the purchase price. The stock's market price is influenced by factors such as company performance, market trends, and investor sentiment.