How shares reward an investor?

If you are a shareholder you can benefit in two ways : capital appreciation and divedend.

Dividend

Usually, a company distributes part of the profit it earns as dividend.
Say a company earned a profit of Rs 1 crore (Rs 10 million) in 2005-06.
It keeps half that amount within the company. This is used for a variety of purposes -- buying more machinery, land or raw materials, building a new factory or setting up a new office. It could even be used to repay loans.
The other half is to be distributed as dividend.

Assume the company has 100000 shares. This would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 100000 shares.
So each share would earn Rs 50. The dividend would then be Rs 50 per share.
If you own 100 shares of the company, you get a cheque of Rs 5000 (100 shares x Rs 50) from the company.

Capital Appreciation

When the company issues shares, it gives a basic value to each share -- say Rs 10. This is called the face value of the share.
When the share is traded at the stock market, however, this value may go up or down, depending on the supply and demand for the stock.
The value of a share in the market at any point of time is called the price of the share or the market value of a stock.
A share with a face value of Rs 10, may be quoted at Rs 100 (higher than the face value), or even Rs 5 (lower than the face value).

If you buy a stock for Rs 10 and sell it for Rs 20 after a year, your return from that stock is Rs 10, or 100%.
Or if you buy a stock for Rs 10 and sell it for Rs 9, you lose Re 1, or your loss is 10%.