Finance at your Fingertips by Moses Ayiku, Jr. MBA OP/ED
Perhaps one of the most popular investment options, stocks, always captures peoples’ imagination! It brings with it the hope that one can buy a stock that will rise in price so high that it gives a positive and significant return.
Everyone researches and tries to project, which stocks are going to perform well in the future! This is not an easy task and there are so many things to consider. Why does it excite so many people to learn about and invest in stocks? Simply put, stocks present an opportunity to make money.
When people have excess funds, or money that they do not plan to spend anytime soon, investing the money in stocks becomes a very credible option for them. That is why we spent time earlier discussing the importance of setting up a budget, opening a bank account, developing a saving plan, and saving money.
Now that one has saved some money, the next step is what to do with it. Keeping large amounts of money in a savings account is not always ideal. Savings accounts in most cases provide a return of about 0.04% APY. (APY means Annual Percentage Yield; this is the normalized representation yield of an interest rate, based on a compounding period of one year.)
The APY simply tells us how much you would earn from an investment in one year. APY is like APR or Annual Percentage Rate. The rate is relatively low. One is not going to see a significant growth in their money by putting it in a savings account for a long period. However, stock market prices rise on average by about 10% every year before the impact of inflation is factored in. That is why we all want to buy stocks! It is a far more lucrative option to look at a possible 10 % return on your savings than a 0.04% return!
The big point that we all should be clear about is this; putting your money in a savings account will truly not earn you much at all. In a way, this the advantage of keeping money in a savings account is that the risk of you losing your money is almost nonexistent. Stocks on the other hand, while giving us an opportunity to make money, also come with risk. One could also lose money buying stocks. If you plan to invest in stocks, this point should be very clear to you. Stocks are risky and you could make money, but you could also lose money.
Stocks represent an opportunity to grow your money in two ways.
1. By getting dividend payments
Dividend payments are the monies that owners of stocks receive annually in most cases (some companies provide dividends quarterly). Please note that not every company pays dividends to its stockholders. Further, even when they do pay dividends, companies may not pay it every single year. The decision for a company to pay dividends depends on many reasons. One of the most important reasons why a company would pay dividends is if and when it has made a sizeable profit in the preceding accounting year.
2. By getting capital gains
When one buys stock at a particular price, the price changes over time. If the price rises and you sell your stock at the increased price, the difference between what you paid for the stock and what you sold the stock for is what we refer to as capital gain. Note that capital gain is described as realized capital gain when you actually sell your stock and capture this return.
If you hold onto the stock and the price has risen, that represents potential or unrealized capital gain. In other words, your stocks are worth more because the price of the stock has risen compared to the price you bought it at. However, you cannot enjoy that price increase until you sell your stock.
You can, however, note in your portfolio that the stock you purchased has increased in value and hence your investment portfolio has increased in value. Your investment portfolio is simply the summary of all your investments in different stocks and other financial investments or assets.
Unfortunately, stock prices can also fall! This is something every investor in stocks should be aware of. Investing in stocks means you are taking a risk. There is no guarantee that the stock that you buy will have their prices going up. The prices could go down. If you buy stocks and the price goes down, you in effect are making a loss and we refer to that as a capital loss.
For example, Mike bought 10 stocks of Apple for $10 each in January 2020. In December of that same year the stock price had fallen to $5 per stock. Mike spent $10 * 10 stocks or $100 to acquire his 10 stocks. By December, his stocks are now worth $5 each so his stock value for his 10 stocks would be the current price of the stock times the number of stock that Mike owns in that company.
In other words, Mike owns 10 stocks * $5 (current price of the stock) would be $50. Mike started with a portfolio of stock worth $100 in January 2020 and ended up with a portfolio of stock worth $50. The capital loss would be the difference between how much Mike spent on his stock and the current value.
In the beginning Mike spent $100 for 10 stocks. With the price falling per stock to $5, Mike has thus had a capital loss of $50. Everyone investing in stocks should keep this reality in the forefront of their minds; there is never a guarantee on what will happen to stock prices of individual stocks.
One could make a capital gain, or one could get a capital loss. If the prices of your stock rise, then you will get a capital gain. If the prices of your stocks fall, you would have a capital loss.
Anyone who wants to invest in stocks should ensure that they learn as much as possible about stocks. As we have indicated, buying stocks entails risk. Before you begin to actually buy and sell stocks, it would be advisable to learn about stocks first.
The next step would be to learn about the different investment principles and guidelines. People who invest regularly in stocks tend to buy stocks after they have conducted detailed research about different companies and their products. The beauty about researching stocks is that there is a lot of information about companies that are listed on a stock exchange.
As part of the rules of listing, all companies are to provide their financial accounts or Financial Statements on a quarterly, half year, and annual basis. Studying the accounts for previous years of operation is a key step in understanding a company. The Annual Reports of companies are documents prepared every year that include information such as the financial performance for the previous year, the management of the company as well as details on the products or services that the company products.
By going through past Annual reports of a company, one can get a great deal of information to assist in decision making as to whether to buy a particular stock or not. Other things to look out for include looking for the dividend pay record of a company. In other words, does the company pay dividends regularly and if so, how much do they typically pay out as dividend payments?
Please feel free to share with me your questions and experiences on stocks and investments. I will do my best to respond, and, in some cases, I will write on some of these questions.
Your questions and comments can be sent to localtalknews@gmail.com
