What is CAPITAL GAINS?
Capital gains are what you make when you sell something for more money than you bought it for. It's like buying a toy for $10 and selling it later for $15 – you made a $5 capital gain!
What is DIVIDENDS?
Dividends are payments that a company makes to its shareholders (people who own stock in the company). It's like the company sharing some of its profits with you just for owning a piece of it.
Key Differences
- How You Make Money: With capital gains, you only make money when you sell something. With dividends, you get paid regularly just for owning the stock.
- When You Get Paid: You get capital gains only when you sell. You get dividends regularly, like every quarter (every three months).
- Risk: With capital gains, the price of what you own could go down, so you might not make a profit. With dividends, the company could stop paying them.
- Effort: Capital gains require you to decide when to buy and sell. Dividends are passive, meaning you don't have to do anything but own the stock.
When to Use Each One
If you think the price of something will go up a lot, like a popular video game, you might want to buy it and try to sell it later for a capital gain. If you want to get paid regularly without having to sell anything, like getting a little money from a company that makes your favorite snacks, you might want to invest in dividend-paying stocks.
The Bottom Line
Capital gains are for when you're feeling a little bit like a gambler and think something will go up in value. Dividends are for when you want a steady, reliable income from your investments. Both can be good ways to make money, so it's good to understand how they work!