How Does a Shareholder Make Money?

The legal structure of a business influences many aspects of how it operates, including the way the owners make money and pay taxes. A corporation is a type of business that sells shares of stock to investors as a means of raising money to finance business programs and expansion. When a company issues stock, the shareholders become owners of the business, but business income doesn't flow directly to shareholders as it does in other types of businesses. Instead, stock shareholders make money through capital gains and dividends.

Capital Gains

When you buy a share of stock, you are technically buying a tiny fraction of ownership in the corporation that issued the stock. The price of a corporation's stock can fluctuate over time depending on company performance. When a corporation performs well or exceeds expectations, its stock price tends to rise. If you buy stock and its price rises after you buy it, you can sell it at current prices to realize a profit called a capital gain. Anyone that owns stock can potentially make money in the form of capital gains.


A dividend is a payment of cash or stock that a corporation makes to shareholders based on company earnings, often on a quarterly basis. Corporations with steady profits sometimes choose to offer dividends as a means to attract and retain investment, but not all corporations pay dividends. The size of dividends can vary from one period to another and shareholders are not guaranteed to receive dividends, meaning a corporation can choose to stop offering dividends at any time.

Capital Gains Tax

Capital gains are subject to different tax rules than normal earned income. Capital gains realized on investments held longer than a year are subject to a long-term a maximum capital gains tax rate of 15 percent. Capital gains realized on investments held a year or less are considered short-term gains; the tax rate on short-term gains is equal to your normal income tax rate, which could be as high as 35 percent.

Taxes on Dividends

Tax rates on dividends vary depending on whether the dividend is paid in cash or stock and whether it is considered a "qualified dividend." Dividends paid in the form of additional shares of stock are generally not subject to income tax. Cash dividends are taxable at your normal income tax rate unless they count as qualified dividends. According to the Internal Revenue Service, you must have owned the stock for at least 60 days during the 121-day period that begins 60 days before the ex-dividend date for a dividend to be qualified. The ex-dividend date is the first day after the announcement of a dividend that new shareholders aren't entitled to receive the next dividend payment. Qualified dividends are taxed at a maximum rate of 15 percent.