How to Make Money Investing in Stocks
How to Make Money Investing in Stocks
One of the best ways to invest money is to purchase assets that either create income, increase in value, or do both.
Some assets may only appreciate in price, such as an art collection or precious metals. You buy them with the idea that they’ll be worth more in the future so you can sell them for a profit. And some assets may only give you income, such as a bond that pays a fixed amount of interest.
Choose the Best Forex Brokers Right Now!
Investments that offer the potential for both income and price appreciation include:
- Rental property
- Businesses
- Stocks
What Are Stocks?
So let’s dig into stocks and why I recommend them for every investor. But first, why do companies issue stock in the first place?
Companies issue stock to raise money from investors—it’s that simple. Maybe a company needs to fund groundbreaking research, open a division in a foreign country, or hire a crew of talented engineers.
Stocks are intangible assets that give you ownership in a company. That’s why they’re also known as equities or equity investments. Owning stock entitles you to part of a company’s earnings and assets.
As I mentioned, stocks can increase in value, which is called capital appreciation. As I’m writing this episode, Facebook (FB) and Apple (AAPL) stock can be purchased on the NASDAQ exchange for $59.83 and $593.76 per share respectively. Walt Disney (DIS) stock is selling on the New York Stock Exchange for $15.03.
So, if you buy Walt Disney at $15.03 per share and the price goes up to $30, you can sell it for a gain of $14.79 ($30 - $15.03). You can easily find urrent stock price quotes on sites like Google Finance and Yahoo Finance.
In addition to capital appreciation, some stocks also allow you to be paid a portion of company profits. That's called a dividend stock and it distributes dividend payments to stockholders.
For instance, right now Discover (DFS) pays a dividend of $0.24 a share. That means if you own 1,000 shares of Discover, you’d be paid $240 in dividends over the course of a year.
Dividend stocks pay you even when the share price goes down, so owning them is a smart way to hedge against potential market losses. You can find a list of dividend stocks on a site like Morningstar.
Pros and Cons of Investing in Stock
There are many advantages to investing in stocks. One is that you don’t need much money to buy them, like you do for other assets like real estate or businesses. Buying just one share makes you an instant business owner without having to invest your life savings or take on all the risk.
Although there’s no guarantee that every stock will increase in value, since 1926, the average large stock has returned close to 10% a year.
The biggest advantage of stocks is that they offer the greatest potential for growth. Although there’s no guarantee that every stock will increase in value, since 1926, the average large stock has returned close to 10% a year.
If you’re investing for a long-term goal like retirement, stocks turbo charge your portfolio and give you the growth you’ll need to achieve it. Over the long term, no other type of common investment performs better than stocks.
The major disadvantage to investing in stocks is that prices can be volatile and spike up or plummet quickly as trading volume fluctuates. News, earnings forecasts, and quarterly financial statements are just a few triggers that cause investors to buy or sell shares, and that activity influences a stock's price.
Price volatility is why stocks are one of the riskiest investments to own in the short term. Investing at the wrong time could wipe out your portfolio or cause you to lose money if you need to sell on a day when the price is below what you originally paid for the shares.
But as I mentioned, you can minimize this risk (but never eliminate it) by adopting a long-term investing strategy. Additionally, being diversified by owning a number of different categories of stocks—such as domestic, international, small company, and large company—will also offset risk.
How to Buy and Sell Stock
Buying and selling stocks is easy to do using a licensed brokerage firm, such as a local company or an online brokerage, like E*Trade.
However, for the average investor, a better alternative to buying individual stocks is to buy stock funds. They invest in a variety of stocks according to a particular objective.
Here’s a brief description of some fund types you're likely to find in brokerage accounts and retirement accounts:
- Mutual funds – are collections of assets, such as stocks, that are managed by a fund professional. Mutual funds provide a simple way to own a portfolio of many stocks. Shares can be bought or sold only at the end of the trading day when the fund’s net asset value is calculated.
- Exchange-traded funds – are similar to mutual funds because they’re baskets of assets. However they trade like an individual stock on an exchange and experience price fluctuations throughout the day.
- Index funds – are a type of mutual fund with an investing goal to match or outperform a particular index, such as the S&P 500. This provides a diversified portfolio with low investor fees.
- Target date funds – are a type of mutual fund that automatically resets the mix of stocks, bonds, and cash in its portfolio according to a selected time frame, such as your estimated retirement date.
Stocks or some type of stock funds should be an important part of every investor’s long-term portfolio.
If you’re young and have a long way to go before retirement, consider owning a large percentage of stocks. Though prices will go up and down in the short term, over time you’re likely to see prices trend up and give you an impressive return.
But if you’re nearing or already in retirement, take a more conservative approach in order to preserve your wealth. That doesn’t mean eliminate stocks from your portfolio completely, just consider owning less and shifting your money into bonds, which give you a relatively lower return, but provide a fixed amount of income.
Choose the Best Forex Brokers Right Now.
Start Your Forex Trading Journey!
No comments:
Post a Comment