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Question
How do I make profit from buying stocks?
Answer
It seems like an unspoken rule to buy stocks as an investor but do you know how the profit comes about? Well, if you have this question or have just a surface level understanding of how stocks work, then you are in the right place. It is only right to start by understanding what a stock is.
Let’s simplify what a stock is!
Stocks are units of shares in a publicly traded company that are listed on a stock exchange and make up an important part of any investor’s portfolio. Companies issue stocks to raise funds for their firms and the buyers, in return are given a partial claim on the company’s assets and earnings in proportion to how much they have invested. For instance, if you buy 500 out of the total 5000 shares of a firm, you own 10% of the company’s assets. When you buy stocks in a firm, you are given the right to vote in shareholder meetings, receive dividends if and when they are distributed and also have a right to sell your shares. Statistics show that stocks have generated outstanding returns for decades and in many cases outperform other types of investments in the long-run.
So how exactly do I make profit by investing in stocks?
There are a couple of ways to make money from investing in stocks but let’s start with the one we are all familiar with—dividends. Every business aims to make profit and this profit made is shared to the shareholders as dividends. The board of directors determine how frequently the dividend should be paid but many companies pay quarterly. You should also know that some companies reinvest the dividends on your behalf which affords you compounding benefits and is perfect if you are taking a long-term investing approach. Some companies pay a special dividend which is a one-time dividend payment to shareholders as a result of a particular occurrence which could be huge, unexpected profit or the sale of a business unit.
One other way to make profit from your stock investments is via capital gain. When a company is doing well in the stock market, its value increases and so does its market price. If you have bought stocks from a firm that fall under this category, and for example, you bought the stocks at $100 per share today, there is a chance that by the next year the stock price has grown to $150 which is a 50% increase in the value of your stocks. If you were to sell it, the $50 extra you made is called a capital gain and this is why your choice of stocks should be done carefully with adequate research and not hurriedly, so you invest in high-quality companies with potential to grow.
Short-term trading is another proven way to make money from stocks. It involves tracking and predicting the market movements within a short period of time, as the name implies, usually within weeks and even days. These traders take advantage of the market fluctuations based on thorough analysis and historical data and make investing moves using the insight derived. As enticing as the sound of making cool cash in just a few days might sound cool, you should bear in mind that this approach carries higher risks as their predictions are not always accurate and sometimes, life happens.
If you don’t want to be bothered with stocks, then buy an equity mutual fund or an ETF. An equity fund also known as a stock fund is a basket of investments with a variety of stocks in a good range of companies helping you diversify your investment. So, instead of putting all of your money into one or two companies, you can spread it across a variety of companies.
Exchange-Traded Funds (ETFs) also give you the diversification you need but are not actively managed by professionals like mutual funds. They are passively managed by tracking or mirroring the market index and, as a result, attract much lower fees compared to mutual funds.
Key takeaways
Making money by investing in stocks is a real deal and should be explored by every investor but with the right knowledge. I hope you have learned a thing or two from today’s letter. Here are some key takeaways for the next time you choose to invest in stocks:
- Maximise the long-term approach. It is a great way to stay consistent and build wealth for yourself. Buy those stocks and hold them for as long as needed so they can grow to their full potential. They say ‘time in the market beats timing the market.’
- Take the option of reinvesting your dividends as much as you can to leverage the compounding interest that long-term investing offers. Each reinvestment earns you more shares.
At MoneyAfrica, we encourage individuals in different phases of life to take charge of their finances. If you have any questions or concerns about your investments or you would like to discuss your portfolio strategy further, join our community by clicking here.
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