There are three main ways to make money on stocks:
- Buy low and sell high.
- Purchase shares as options, in terms of which the price change is incorporated.
- Form a portfolio of shares from which it will be possible to profit in the form of dividends.
There are two ways to make money by changing the course. Either buy when the price falls temporarily and after a while, waiting for the rise, sell (long). Or borrow shares from a broker, sell at a high price, and then buy at a lower price (short).
The second option assumes some experience and understanding of the market, the first is available to a wide range of players. In the first option, the benefit is less, but the risk is lower, and the process itself does not require special specific knowledge and skills from the holder. In the second case, the ability to take a balanced risk, time, attentiveness, and deep immersion in the topic will be required.
We will dwell on the third way of earning in detail since it can be considered a full-fledged investment.
How to Invest in Stocks Correctly?
Here are some important theses on how to invest in stocks. They will be useful to market participants who do not yet have experience of interacting with this type of security:
- Collect information. There is a ton of specialized literature such as Warren Buffett’s annual letters, Lynch’s, Graham’s, and many more.
- If you can get to know the company where you are going to invest more closely, do it. Focusing only on documents, you will never learn about the many things that can play a key role in the rise or failure of an organization. And such a factor can be a mere trifle, such as a well-located office or renovation of the vehicle fleet.
- Engage professionals. If you cannot make an informed and informed decision on your own, invite a professional broker or financier for consultation. But remember that all the risks for the decisions made are borne only by you.
- Plan long. 8-10 years is the period for which it makes sense to focus. If there is any doubt that a potentially interesting company will live that long, then you do not need it.
- Don’t waste your last. To invest in stocks, you need to have really free funds. And preferably a financial cushion with a one-year margin.
- Diversify your risks. Build a portfolio of 10–12–15 stocks. Expand it as much as possible, increase your investment capital.
- Be flexible. If the share price has risen by 40-50% – think about whether it makes sense to sell the shares and “close” this part of the investment, remaining with a good profit.
The first deal for a newcomer to this market is likely to be done with the help of a company that is the official intermediary between investors and public companies on trading floors around the world. In order for you to be able to purchase stocks, you need a good and safe broker. Read our review about brokerage exante reviews and learn how to start investing correctly.
How to make money by investing in stocks?
Speaking about how to invest money in stocks, it should be noted right away that there are few countries in which these securities circulate in the classic form of securities proper. For a long time, trading has been carried out using electronic registers – this means that the range of opportunities for buyers of securities has expanded. Here’s how you can invest money in stocks today:
- independently, buying shares from intermediaries or investors under an agreement;
- on the stock exchange through a broker (you need an account opened with a brokerage company). This method assumes commission payments to the intermediary;
- indirectly – through mutual funds (mutual funds). In this case, portfolio management rests with the fund’s management. The investor only invests funds, receives dividends, and pays commissions to the fund.
We can also mention options and futures – this is a way to make money on the difference in the price of shares in different time intervals, but not a full-fledged investment tool that involves long-term planning.
The same can be said about speculative investments in stocks. There are two options here: to buy shares during a crisis of the enterprise and resell later, when the situation stabilizes, or to buy shares of promising young companies in order to sell them after a short time at the peak of value. In this option, the risk is high, but the profit is also offered higher than for long-term investment.
If the initial capital is modest for this market (for example, two thousand dollars), then such short-term investments, if successful, will quickly increase capital. Subsequently, it will be possible to form a portfolio for a long-term investment. But success requires a good understanding of the stock market.
Types of shares and distribution of dividends
Shares can be ordinary and preferred, that is, with the right to priority payment of dividends and a rate higher than that of ordinary shares. They also give the holder extended rights to participate in the management of the company (compared to ordinary shareholders).
You can invest in stocks directly, through mutual funds, options, funds, brokers, and so on. The choice depends on the strategy, portfolio, capital, and investor experience.
Earnings on dividends – annual (or based on the results of half a year/quarter /another time interval). The amount of profit is not fixed and depends on the annual profit of the joint-stock company. That is, from the amount that will remain with the company after deducting all taxes, expenses, costs, and investments in business development. The remaining amount is divided between investors and shareholders. For preferred shares, payments are made earlier than for ordinary shares.
Dividends can be cash or stock – paid in property or securities. Payments are taxed like any other income. The calculation of the shares of shareholders is made in proportion to their contribution to the company’s shares.
It makes sense for an investor who chooses to earn on dividends to diversify his portfolio by investing in different organizations and sectors. It also makes sense to compose it not only from stocks – take their other instruments, for example, bonds, as an asset.
Which stocks to invest in?
Someone prefers shares of enterprises that grow for a long time and slowly, providing investors with stable dividends. Investors who want a stable inflow of capital usually invest in stocks of companies that operate in the most stable sectors and have a long history of dividend payments. These can be blue chips, utilities, real estate investment trusts, and so on.
Other investors choose young company stocks, which can go up sharply or even fall below par.
The general rule for choosing which stocks to invest in is the same as for any investment direction: you need to choose the areas in which you understand. After all, many factors affect the success or failure of any organization. Only by knowing the situation in terms of volume and dynamics, it is possible to assess its real advantages and development prospects.
Can stocks be considered an investment?
You can, while always remembering that income on shares is not guaranteed. Even a conservative investor who invests in steadily growing companies that provide high returns still risks, albeit minimally.
That is why there was a clause above that one should not invest in shares as the only and last decision, and even more so it makes no sense to give the last one. Shares are a direction for investing free funds in order to gradually increase capital.