Shares
On a very basic level, there are two ways of making money from the stock market.
1. Buying shares for their dividend payments
2. Trading shares- buying low, selling high
3. A combination of both.
In buying shares, you are buying a percentage of ownership of the company. In return for this, you will get a share of the company’s profits. These profits are usually paid out to shareholders every year in the form of a dividend. You will receive a certain amount for every share held, for example, you might receive a dividend of 12p per share. If the shares were worth £1 then the dividend would be 12%, whereas if each share was worth £16, then the dividend would be far less significant. (0.75%) It is important to take all of this into consideration when investing.
In times of economic prosperity, dividends should be fairly high, as the company will be making more money, but so will the share price as there is more demand from investors. The opposite is true in a recession- share prices and dividends are lower.
What you would then want to do is to buy shares in a recession, as they will have a lower value, and then enjoy the larger dividends when the economy recovers.
This is not the only way to make money from the stock market. You can also trade shares. You try and buy shares in companies that should rise, (e.g. they are developing a new technology) There are plenty of reviews both on the internet and in papers. The telegraph website usually has recommendations on shares. Bear in mind that these are recommendations and aren’t necessarily correct. Knowing which shares to buy isn’t really the difficult part. The greatest difficulty lies in knowing when to sell your shares. My advice is to have a formula and stick to it. For example, you might always sell your shares once they have risen by 20%. This may mean that you might lose out, if the share price rises further, but on the other hand, if the share price then drops, you have already made and taken your profit.
I am not going to go and give you detailed results, but here are a few sensible pieces of advice to investing in the stock market.
1. Only invest money you can afford to lose.
2. Do not borrow money to invest in the shares.
3. Don’t put all your eggs in one basket- invest in a selection of shares, as this will reduce your loss if a company goes bust.
4. Research the companies- don’t invest without looking into each company