Final answer:
Shareholders generate returns through capital gains, by selling stock for more than they paid, and through dividend income, which are distributions of company earnings.
Step-by-step explanation:
Shareholders purchase shares with the intention of generating a return, which may be realized in one of two ways: through capital gains and dividend income. For example, if an investor purchases a share of stock at a certain price and later sells the share for a higher price, the profit made from this transaction is known as a capital gain. Additionally, shareholders may earn money through dividends, which are payments a company makes to its shareholders out of its earnings.
Firms have the discretion to pay dividends or not, and the stock price can fluctuate significantly. These fluctuations can result in substantial gains or losses for the investor. For instance, the price of Netflix stock varied widely over a few years, going from $295 per share to $53.91 and then recovering to $414.