You make money from stocks in two ways: the price goes up and you sell for more than you paid (capital gains), or the company pays you a share of its profits while you hold the stock (dividends). Everything else in stock investing, from picking a brokerage to choosing between index funds and individual companies, is about putting yourself in the best position to capture those two sources of return while keeping costs and taxes low.
How Stocks Actually Make You Money
Capital gains are the more familiar path. You buy shares at one price, the stock rises, and you sell at a higher price. The difference, minus any fees, is your profit. If a stock drops below what you paid and you sell, that’s a capital loss. Stock prices move constantly during trading hours, driven by company earnings, investor demand, and broader market conditions. You don’t realize a gain or loss until you actually sell.
Dividends work differently. When a company is profitable, its board can choose to distribute some of those earnings to shareholders. You receive cash payments, typically every quarter, just for owning the stock. You can pocket that cash or reinvest it to buy more shares, which compounds your holdings over time. Not every company pays dividends, and those that do can cut or eliminate payments at any time. Stocks known for paying higher-than-average dividends are often called “income stocks,” and they tend to be larger, more established companies.
A company generally needs strong earnings to sustain a dividend, and it needs investor demand for the share price to rise. The most profitable long-term investments often deliver both: steady dividends plus gradual price appreciation.
Open a Brokerage Account
To buy stocks, you need a brokerage account. Opening one is straightforward and typically takes less than 15 minutes online. You’ll provide your Social Security number, a government-issued ID (driver’s license or passport), your employment status, and basic financial information like your income and net worth. The brokerage uses this to verify your identity and understand your investment profile.
You have two main account types to consider. A standard taxable brokerage account has no contribution limits and no restrictions on when you withdraw money, but you’ll owe taxes on gains each year. An IRA (individual retirement account) gives you tax advantages, either a tax deduction now with a traditional IRA or tax-free withdrawals later with a Roth IRA, but it comes with annual contribution limits and penalties if you pull money out before age 59½. If you’re investing for retirement, an IRA is usually the better starting point. If you want flexibility to access your money anytime, go with a taxable account. You can have both.
You Don’t Need Much Money to Start
The old barrier of needing thousands of dollars to buy a single share is gone. Most major brokerages now offer fractional shares, letting you buy a slice of any stock or ETF for as little as $1 to $5. Fidelity lets you purchase fractional shares of more than 7,000 U.S. stocks and ETFs starting at $1. Charles Schwab’s Stock Slices program covers every stock in the S&P 500 with a $5 minimum. Robinhood allows purchases as small as one-millionth of a share.
Trading commissions have also largely disappeared. Fidelity, Schwab, Robinhood, and several other brokerages charge $0 commission on online stock and ETF trades. A few platforms still charge small fees (Tastytrade, for instance, has a $0.10 clearing fee per fractional trade), but the industry standard is now zero. This means you can invest $25 a week without fees eating into your returns, something that was impossible a decade ago.
Index Funds: The Simplest Path to Returns
If you’re looking for the strategy most likely to build wealth over time, index funds deserve your attention first. An index fund is a single investment that holds all the stocks in a particular market index, like the S&P 500 (the 500 largest U.S. companies). When you buy one share of an S&P 500 index fund, you instantly own a small piece of every company in that index.
The track record is hard to argue with. According to the SPIVA scorecards, which track professional fund managers against their benchmarks, roughly 9 out of 10 actively managed funds failed to match the S&P 500’s returns over a 15-year period. That means the vast majority of professionals who pick stocks for a living, with teams of analysts and access to sophisticated research, underperformed a simple index fund. After accounting for the higher fees that active funds charge, the gap widens further.
Index funds also carry lower costs. Their expense ratios (the annual fee expressed as a percentage of your investment) often run between 0.03% and 0.20%, compared to 0.50% to 1.00% or more for actively managed funds. On a $10,000 investment, that’s the difference between paying $3 to $20 per year versus $50 to $100. Over decades, those savings compound significantly. Index funds also generate fewer taxable events because they trade less frequently, which means you keep more of your returns.
Picking Individual Stocks
Buying shares of individual companies can deliver higher returns than an index fund, but it also carries more risk. A single stock can drop 50% or more on bad earnings, a scandal, or an industry downturn. An index fund absorbs those blows because losses in one company are offset by gains in hundreds of others.
If you want to pick individual stocks, focus on what you can evaluate. Look at the company’s revenue growth, whether it’s consistently profitable, how much debt it carries relative to its earnings, and whether it operates in an industry you understand. Companies with strong earnings are more likely to sustain dividends and attract the investor demand that drives share prices higher.
A practical approach for most people is to build a core portfolio of index funds (covering 80% to 90% of your investments) and allocate a smaller portion to individual stocks you’ve researched. This gives you the diversification and reliability of the index with the potential upside of individual picks, without putting your entire portfolio at risk if one company stumbles.
The Role of Time in Building Wealth
The single biggest factor in making money from stocks is how long you stay invested. The U.S. stock market has historically returned roughly 10% per year on average before inflation, but those returns aren’t smooth. In any given year, the market might rise 25% or fall 15%. Over 20 or 30 years, though, those swings average out, and the compounding effect becomes powerful.
Here’s what compounding looks like in practice. If you invest $300 per month and earn an average annual return of 8%, you’d have about $89,000 after 15 years and roughly $176,000 after 25 years, even though you only contributed $54,000 and $90,000 respectively. The rest is investment growth on top of growth. The earlier you start, the more time compounding has to work.
This is why selling in a panic during market downturns is so costly. Investors who sold during past crashes and waited to “feel safe” before buying back in missed the sharpest recoveries, which often happen in the first few weeks after a bottom. Staying invested through volatility, while uncomfortable, has historically been far more profitable than trying to time the market.
Taxes on Your Stock Profits
How much you keep from your stock gains depends on how long you held the investment. The IRS draws a sharp line at one year.
Short-term capital gains apply to stocks you held for one year or less. These profits are taxed at ordinary income tax rates, which range from 10% to 37% depending on your total taxable income. If you earn $60,000 and sell a stock for a $5,000 profit after holding it for six months, that $5,000 gets added to your income and taxed at your marginal rate.
Long-term capital gains apply to stocks held for more than one year, and the rates are significantly lower. For 2026, single filers pay 0% on long-term gains if their taxable income is under $49,450, 15% on gains above that threshold up to $545,500, and 20% above $545,500. Married couples filing jointly get the 0% rate up to $98,900 in taxable income. That 0% bracket means many moderate-income investors can sell long-term holdings and pay no federal tax on the gains at all.
Dividends follow similar rules. “Qualified” dividends, which most dividends from U.S. companies are, get taxed at the lower long-term capital gains rates. Non-qualified dividends are taxed as ordinary income.
If you’re investing inside an IRA, none of this applies until you withdraw. Traditional IRA withdrawals are taxed as ordinary income. Roth IRA withdrawals are tax-free in retirement. This is one reason tax-advantaged accounts are so valuable for long-term stock investing.
Putting It Into Practice
Start by opening a brokerage account at a firm that offers commission-free trading and fractional shares. Fund it with whatever you can afford consistently, even if that’s $50 or $100 per month. Buy a broad-market index fund, such as one tracking the S&P 500 or the total U.S. stock market. Set up automatic contributions so money flows into your account on a regular schedule without you having to think about it.
This approach, called dollar-cost averaging, means you buy more shares when prices are low and fewer when prices are high, which smooths out your average purchase price over time. It also removes the emotional decision of trying to pick the “right” moment to invest.
As your balance grows and you learn more, you can add international index funds for broader diversification, allocate a portion to individual stocks, or explore dividend-focused funds for income. But the core principle stays the same: invest regularly, keep costs low, hold for the long term, and let compounding do the heavy lifting.