Source- The Balance
Some of the richest people on the planet have gained a significant part of their wealth by investing in the stock market. Now you’re probably thinking that you should also try it out so you can perhaps become rich. The good news is that yes, it is possible to get rich by investing in stocks. The bad news is that it is not easy. But then again, neither are many things in life. So how does one invest in the stock market the right way to maximize their profits?
The first thing you need to do on your success journey in the stock market is to start from the beginning and to learn everything about the markets. When you know everything there is to know about stocks and how the stock market works, then you have a higher chance of attaining success.
What is the stock market?
The stock market can best be described as a market where companies list their shares so that they can be purchased by members of the general public. The shares are collectively referred to as stock. The U.S has two major markets which are also the largest globally. They are the NASDAQ and the New York Stock Exchange. These two are where major companies such as Google, Amazon, Apple and many more are publicly listed.
What is a share?
The size of a company in terms of financial muscle is usually measured in terms of market capitalization. This amount is then divided into units that are known as shares, which are then sold in the market to raise capital. Think of it as providing capital for business as one of the owners and thus you get to also enjoy the profits. When a company makes profits, those profits are divided to the shareholders based on the number of shares that they own. The value of a share may go up or down depending on various market factors. This creates one of the avenues through which people make money through stocks.
How to make money through stocks
Figure 1 Source- Fidoc
There are mainly two ways in which one can make money in the stock market.
- As a long-term investor where you purchase shares so that you earn dividends which Is the profit per share. This is the approach that is mainly used by big investors so that they can take advantage of the margins. For example, an investor that has purchased shares worth $1 million in company X will earn dividends every time the company pays out dividends. If each share is worth $100 at the time of the purchase, then the shareholder will own 10,000 shares of company X. If the company pays out dividends at a rate of $10 per share, then the shareholder will earn $100,000 in dividends.
- You can trade shares as a retail trader where you purchase shares when the price is low and resell the shares to the market when the price goes up. For example, if a person invests $1000,000 in company X to purchase shares when they are worth $100, then the person resells the shares when the price climbs to $105, then they will have made a profit of $5 per share, then they will have made $50,000.
Investing in shares for dividends is the easier of the two because the investor gets to earn passive income so they do not have to do anything to make money. They make passive income as long as the company earns a profit, and more specifically when the company pays out dividends. If you choose this option, then you have to make sure you invest in a company or companies that have a high potential for growth, which in turn means a higher chance that you will earn handsome dividends. Note that you do not earn dividends if a company makes losses. Also, note that this option requires a larger sum to really enjoy significant earnings.
Retail trading might be the more difficult of the two but it requires less capital to really take advantage of the market opportunities. Most people choose this option but the difficult part is the fact that you have to be actively involved in the market and also, you have to determine good entry points where the price will likely be in your favor. This option is better for those that want to make money in the short-term while the former is best-suited for long-term investing.
The role of a brokerage account
You need to have a brokerage account if you want to trade stocks. Brokers provide a link to the markets, thus facilitating less friction for entry into the markets. However, they charge a fee since they provide a service but then opening a brokerage account paves way for opportunities to earn money. Conduct some research to determine the best brokerage firm that is best suited for you and then open an investment account with your preferred broker.
Brokerage firms also provide traders with investing tools that allow them to analyze the market through technical analysis. One of the most common of those tools is MetaTrader which is a highly popular platform that provides charts and tools for various financial instruments including stocks, forex indices, and commodities.
Which stock to purchase
Once you have opened a brokerage account and funded it, you can proceed to choose a company or companies whose stock you can purchase depending on your preferred investment style. You should consider doing proper research before investing so that you select companies that are most likely to succeed, thus helping you to achieve your trading objectives.
Note that you can invest in more than one company if you have enough money. You can create a diversified stock portfolio where you invest in companies from different industries or invest in those from the same industry. For example, the tech industry has a very high number of successful firms such as Apple, Google, Qualcomm, and Microsoft among others.