You have probably heard of people talking about investing in stocks. Stocks (otherwise known as shares), are an asset that allow investors to own part of a company. But what does owning a stock give you?
A stock can give you access to income by way of dividends. Dividends are a payment (often from income generated by the business) on a periodic basis. Many stocks pay dividends bi-annually (twice per year) and the bigger stocks often pay around 3 – 5% dividend returns each year. This depends on the stock, however it is a rough guide to give you an idea of what you might see in the market.
A stock also gives you access to capital growth. Capital growth is when a stock moves up in price from where you bought it. You realize capital growth upon the sale of your shares. That means to get money out from a capital gain, you have to sell part of your asset.
“The main purpose of owning shares is to increase wealth and protect against inflation.”
Invest in stocks and Diversify by Industry
Diversifying in shares can be an easy way to enter the market if you have enough to invest in a few stocks at once. Some industries do well at certain times of the year, others might perform well when others are performing poorly. Owning stocks in diverse industries helps to reduce risk of losing money when one industry is struggling.
Selecting strong companies that perhaps are cheaper than normal can help you build a good asset base over time. Don’t over complicate things as the biggest factor in wealthy investors is starting early and taking advantage of compounding interest.
When you are starting out, stock selection can be very daunting. People will have opinions on everything and many of the people around you trying to tell you the best stocks or bad decisions, will unlikely be professionals in finance. Do your own research and don’t listen to people that don’t know. If people start throwing their opinions at you, ask them kindly, what experience they have in the area.
Some basic tools can help you to tell whether the stock might rise or fall. Look at it’s historic price and the current price. Where does the current price sit compared to what might happen based on previous pricing. This type of analysis can be done using a chart.
Check the reports. If you were running a business, look for things that would be good and bad for a business. Do your best initially, you will learn what is good and bad with more experience. For example, if you see company directors taking remuneration at 2 times the rate of their profit, that’s going to mean the business will eventually run out of money unless it doubles it’s profits. Or if the only income coming in for the business is from capital raising as an established business, it is not earning money would be more of a liability than an asset to you.
Start investing in stocks
If you are scared, don’t wait. Just ease in slowly as the best way to learn is by experiencing what actually happens and how you react. Work towards building a portfolio, remembering that also includes cash so you don’t have to invest all your money to be investing in the market. Consider keeping a diary on your lessons learnt and experiences over time. It would be a great thing to look back on long term and it will help you etch in the lessons you have overcome over time.