Many may be intimidated at first by the thought of investing in the stock market due to the risk posed to their capital (money) and not knowing enough about stocks generally. But once you understand the basics you will realise it is a straightforward process and the journey is uphill from there. First, lets confront some fallacies.
Get rich quick??
The stock market is not a get rich quick avenue and it is not your personal casino. So, if you had that in mind I would advise you to change that mindset. If this medium for capital growth is used incorrectly it can lead to financial ruin. It requires knowledge and understanding of what you are buying and then patience to earn your reward. Many who venture into stocks come with the wrong mindset which then leads to frustration when expectations aren’t meant and then abandon this quest due to extreme loses and over failure. Warren Buffet the world’s famous stock investor said it brilliantly, “the Stock Market is a device for transferring money from the impatient to the patient”. We at CVI will add this as well, it is also a device for transferring money from those who didn’t do their homework to those who did.
Stock Market and Stocks
The stock market is a platform to provide private companies an avenue to invite the public into partaking in ownership of their companies. This invitation is done through an Initial Public Offering (IPO) where the company issues shares to the public to raise money. If this IPO is successful, the company becomes listed. The stock market allows for the trading of shares/stocks of a company between buyers and sellers. The share/shock is what is representative of the ownership of a company. Meaning, when you buy a stock you are buying a piece of a company, and that piece you will own. Your ‘piece’ represents a percentage of the overall ownership. The buying or selling of a stock is called trading. If this is done within a day it is called Day-trading. Deploying your capital over an extended period after doing research and understating the risks of a company with the expectation of a return is called investing. More on that here.
So, to the common questions. Can you make money? Yes. Can you make money in a short period? Yes. In the basic sense, the stock market can allow for the compounding growth of one’s capital. Meaning you not only make money on your principal (original investment) but also on the returns gain before. There are two main ways to make money on the stock market. Firstly, through dividends which simple means capital distribution. This is when a company distributes some of its profits to share holders. Secondly through price appreciation. Meaning, increase in the price of the stock. You benefit when the stock price is greater than what you original bought it at.
Test Your Knowledge
How can you make money in the stock market?
Explain your answer.