Finance at your Fingertips by Moses Ayiku, Jr. MBA OP/ED
We want to invest in stocks so that we can get a return on our money. History tells us that the stock market prices grow by about 7-12% every year on average. This means that depending on the stocks that you invest in, one could make a decent return. There is also the possibility that those stocks could also pay us dividends! In which case, we stand a chance to earn even more. Having noted all these possibilities, we always must emphasize that it is very important for us to conduct our research before we start spending our money on stocks!
The prices of stocks could rise for sure, but they could also fall! There are many philosophies about buying stocks. To gain in the market, there are several key stock buying options. You could buy a set of stocks and hold onto them for years, hoping for the continuous price increases to lead to large capital gains. We could also identify stocks that are low in price today, buy them and wait for the price to rise before selling them. In other words, a way to make money from stocks is to buy low and sell high. To buy the right stocks for this strategy, also requires a great deal of research. There is no guarantee on which direction any stock price will move.
The simple fact is that if you want to invest in the stock market, then please be prepared to learn about the market and regularly research. It can be fun. As you continue to learn about stocks, you will become quite knowledgeable and savvy about investing. There are ample sources of information and education about stocks. A simple google search will reveal many sources of information about stocks. Most brokerages have websites where they provide free education about stocks as well.
When you buy a stock for $100 today, the price could rise and when it does, it presents an opportunity for you to make money when you sell the stock. James bought shares of a company called Orange. James bought 10 stocks at the price of $10 each in January 2020 of Orange. In effect James owns 10 stocks or shares of Orange and he spent $100 to acquire those stocks. In December 2020, James receives a notice from the company informing him that each shareholder or investor in the stock of the company is going to receive a payment of $2 dollar in dividend for every stock they own.
Normally, companies pay dividends to their shareholders when they have had a good financial year and made strong or high profits. James is ecstatic! He spent $100 in January on the stock. James bought each stock at $10 and is going to get $2 in dividend payments for each stock that he owns. His dividend payment will be 10 stocks times $2 or $20. Basically, dividend payments are the returns or amounts of money that a company shares with its shareholders after posting a strong level of profits and deciding at an Annual General Meeting to share their good financial fortune with all stockholders of the company.
By December of 2020, the stock price of Orange has increased from $10 to $12. The price of the stock has in effect risen by 20%. James now has stock that he bought for $100 but that is now worth $120. Let us not forget that James also received $20 in dividend payments!
The increase in price represents what we call potential capital gain or unrealized capital gain. This is because the only way James can get that extra money is by selling his stock. If James sells his stock at $12 each, he stands to earn $120. That represents a capital gain of $120 – $100 = $20.
The amount of $120 is how much James sold the stock for in December 2020. The $100 is how much James bought the stock for in January of that same year. To get the capital gain amount that James earned, we simply subtract his initial investment on the stocks from the amount he made selling the stocks. James had a capital gain of $20.
Stocks or shares are part ownership claims on companies. In other words, a stock simply represents ownership in a company. Companies get listed on the stock market to raise funds in most cases for expansion projects. For example, Mr. Smith may own a pineapple juice company that packages and sells bottled pineapple juice on the open market to stores and wholesale distributers. Mr. Smith may realize that an expansion of the plant would earn him more money as more people switch from drinking soda to drinking healthy alternative such as pineapple juice.
The demand for pineapple juice is expected to grow significantly over time. Then challenge for Mr. Smith is that he knows that the market will want more of his pineapple juice, demand will rise. But the issue is that to take advantage of that expected increase in demand for pineapple juice, Mr. Smith needs millions of dollars in investment funds which he does not have. This opportunity may not be available forever. If Mr. Smith does not expand to supply more pineapple juice, clearly, competitors could step in and supply the juice, in which case Mr. Smith would miss out on this opportunity.
Given that Mr. Smith does not have the money to finance the expansion, he can look at different options for raising money. One option would be to borrow money, get a loan from the financial market and use that for the expansion. However, there is a risk and problem with financing a long-term project using loans.
Given the complexity of stocks, we will focus on sharing information that will assist an individual to be able to understand stocks. At the end of the day, the stock market is simply a market. Just as one would go to Walmart or any other store, the stock market is also a place where stocks of companies are bought and sold.
Unlike other markets though, you and I cannot go to the market ourselves to buy and sell stocks. We have intermediaries, stockbrokers and brokerage firms who have been trained and duly licensed to buy and sell stocks on behalf of the public. The stockbrokers and brokerage firms charge a fee for this service. Each broker or brokerage firm has different fee structures and when one is looking for a broker, that is often one of the key things that you should read on and learn more about. How much does each broker charge for their services? This is the basic question that we must answer to help us select the broker or brokerage firm that would be most suitable for us.
Anyone who wants to invest in stocks must be aware that they could make money, but they could also lose money. Stocks are risky and the reason people take the risk is because of the potential for making high returns. However, we cannot state it often enough, one could also make losses in the stock market!
To give yourself a chance of investing in stocks and making money, it is very important to learn about the market. Information is widely available about stocks. Many people investing in the stock market typically teach themselves about stocks before they start on the journey of investing. There are television programs and radio shows dedicated to stocks. It would be a good idea to adopt some of these and tune in regularly to learn more about stocks. Next week, we will continue to discuss stocks and highlight different aspects of investing in stocks. .
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
