If you’ve never invested in the stock market before, this arena may seem mysterious and attractive at first. Many are lured in by the potential to earn big money. Though, the truth is that putting your money in the stock market is dangerous unless you really know what you’re doing.
Thus, here’s a brief guide on how ordinary people—like you—can start making money through the stock market.
Why Is The Stock Market Considered Profitable For Investment?
First of all, look at it from a company owner’s point of view. Companies are listed on the stock market because the company owners believe they can sell shares of the company to investors. Investors can be anybody who has sufficient cash to buy a certain number of shares.
Some investors have more money than others, so they become major investors. The more people invest in that company, the more ‘equity’ or stock shares they will own. In turn, the company owner will receive equity and can use it for activities to improve the company’s business performance.
Technically, this equity is the property of the investor, not the company. Therefore, the investor is considered a new owner of a ‘part’ of the company. Take note that the ownership is measured in terms of shares, meaning the investor doesn’t own the entire company, just part of it. But since investors invested their money in those shares, that legally implies that the company can use the funds for business activities.
Major and minor investors can track their investment in several ways. Primarily, though, they can find out about the company’s activities in the stock market by paying attention to stock news. Monitoring the market helps in being updated about the performance of their shares.
Investors Gain Dividends
This kind of investment relationship also means that the investor has to be paid to use their equity. Thus, after a profitable business period, the company owner has to pay a certain percentage of the investors’ profits.
The percentage will largely depend on how much the investors invested at the start. Generally, those who invested more money will be given back more money. The return on the investment can now be called ‘dividends.’
Investors don’t have to give up their shares when it’s time to be paid dividends. That’s the beauty of stock investments. As long as you keep allowing the company owner to use your ‘equity’ for its business activities, you’ll keep receiving dividends.
An investor like you will have complete freedom to use your dividends as you see fit. For example, you can withdraw all your dividends and go to Disneyland with your kids, if you like. But some investors are prudent and simply ask their brokers, like those in Pepperstone, to use their dividends to buy additional shares in the same company.
Grow With The Company
Another way you could profit in the stock market is through ‘capital gains.’ This simply means that the shares you invested money to acquire may become more valuable through time because other people observed that the company seems to be doing very well.
As a result, these other people may want to acquire shares in that company. So, they may wait for the company’s previous investors to offer to sell their shares to the public. In that case, those shares are suddenly increasing in value because so many new investors want to acquire them. This, then, is what ‘capital gains’ means.
So, if you feel that you’ve profited enough from the company, you may opt to sell your shares to other investors and collect the money. This isn’t unusual and is part of the game of stock market investing. Some investors really buy into companies and wait for the share price to go up and then sell. They want the profit, not the long-term involvement with the company.
Understand What You’re Getting Into
If you truly want to try investing in stocks, it pays to be insightful about why you’re aiming to do this. Here are initial considerations to think about:
- You need to know why you picked a particular company. Is that company currently the toast of the stock market community since its share price is soaring? Or has the company been in the news recently because of their great new product benefitting many people? Or maybe you’ve heard rumors that the company will be paying out a high dividend rate to its investors? You need to be certain about your ‘why’ before everything else.
- You need to be sure how much money you intend to reap from your investment. Take note that you already know about capital gains and dividends. If you’re investing a small amount, say USD$1,000, how much would you think is a fair profit for that? If you’re investing a larger amount, say USD$10,000, then you’re probably aiming for a more significant profit.
- You need to know the language of the stock market. There is more to the stock market than just knowing about investments, dividends, and shares. The stock market has its own legal terms, so you may want to spend more time understanding the jargon used and how these apply to investments in the stock market.
- You need to check how much time you’ll hold on to your shares. Whether you’re hoping for capital gains or aiming to earn dividends, time is the crucial element that will dictate your stock market investment’s profitability. It’s advisable to put in money that you probably won’t urgently need for some time, and keep that money in the company for the long term. If you want quick gains, that involves becoming a stock market trader; it’s a riskier move, and not really advisable unless you’re already well-schooled in the finer points of stock market investing.
Investing in the stock market can be dynamic and fun, but it can also be quite risky. If you want to try stock market investing, you should only use money from your disposable income fund, as you won’t be urgently needing it soon. You should also try to educate yourself further about how trading stocks is done.
Like any other investment activity, you should learn as much as you can before you put in your hard-earned money. If you aren’t sure yet about how to invest, find a mentor to guide you so you won’t lose much money, especially when you’re just starting in this kind of investment.