Question

The returns investors receive from holding common stocks may be in two forms. They are ____.

a. future earnings and treasury stock
b. cash dividend payments and capital gains
c. cash dividends and stock dividends
d. stock splits and stock dividends

Answer 1

Investors can earn returns from common stocks through cash dividends and capital gains. Dividends are payments made by the firm to shareholders, while capital gains arise from selling the stock at a higher price than it was bought.

Step-by-step explanation:

The returns investors receive from holding common stocks may be in two forms: cash dividend payments and capital gains. When a firm issues stock, they recognize that investors expect a rate of return through dividends, which are direct payments made by the firm to its shareholders. Alternatively, investors can earn a return by selling the stock for more than they paid, which is known as a capital gain. For example, purchasing a share of stock for $45 and selling it for $60 results in a $15 capital gain.