The stock market is one the vehicles that is available for an ordinary investor to grow his wealth. Investing in stocks is basically purchasing shares of publicly listed companies thereby giving the investor the right to participate in the earnings of the company as well as to affect the company’s operations by participating in the stockholders meeting.
There are two ways on how an investor grows his money through the stock market. One is by receiving interest in the form of dividends and the other one is through the appreciation in value of his shares of stocks.
Dividends are simply the distributed portion of a company’s earnings to its shareholders. It can be in the form of cash which is called cash dividends or it can be in the form of additional shares which is called stock dividends. Dividends unlike interest are not fixed. It is at the discretion of the Board of Directors of the company whether they will declare dividends or not.
Capital Appreciation, on the other hand, is the increase in the market value of the stock over time. This happens during good economic conditions coupled with the company making announcements on developments and strong corporate earnings. Appreciation in value also involves market demand on a stock. The higher the demand for a certain stock, the higher the price will be.
There are a number of reasons why stocks rise and fall in value. If a company is doing well, most probably the stock will rise however there are other factors that affect rise and fall of the markets. Economic factors certainly play a big role. If the overall economy is good, the stock market would probably in an uptrend and the opposite happens when the economy is not performing. On the other hand, disasters, wars and commodity prices also affect and influence the movement of the markets.
Stocks can be purchased in the National Stock Exchanges through local brokers. Stocks that are available to local investors are the ones that are listed in the secondary markets and on over-the-counter markets. The New York Stock Exchange and the American Stock Exchange are two of the major exchanges in America. The Securities and Exchange Commission (SEC) protects investors and oversees all the corporations listed in the local stock exchange.
Before investing in stocks, it is important to know the investment objective and the risk appetite of an investor. This will determine the type of stock that will suit his investment style. Income stocks are those that provide revenue to the stock holders in the form of dividends. This type of stock is suitable for an investor that needs recurring cash flows from his investment. On the other hand, Growth stocks are companies that reinvest profits instead of paying out dividends to help sustain growth and increase the size of the company. This type of stock is for younger investors looking for long term capital growth. Moreover, there are also speculative or penny stocks which are usually companies at their start-up phase or companies that are small but have good future prospects. Speculative stocks as the name implies are the most risky of all stock investments but these investments can also give the highest potential return. These category of stocks are for investors looking for high returns in exchange for higher risk.
The next step in investing is for an investor to decide where to put his investment capital and to choose his investment style. This is a decision that needs to be made by the investor after considering the above factors. A style that works for many investors is the buy and hold strategy. This consists of purchasing high grade stocks that have attractive valuations, reinvesting dividends and holding on the position for a long period of time.
Stocks offer the potential for higher returns specially if taken as a long term investment. Because of the volatility in the markets, stocks are not appropriate to be a vehicle for short term investments. A well managed portfolio of stocks can give a return of as high as 18% per annum on a compounded basis.
Having said that, choosing the right companies that will comprise an investors portfolio is a crucial part in order to make money in the stock market. That is why seeking professional advice can certainly help an investor in making sound investment decisions and thereby growing his wealth in the stock market.
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