Investing can help grow wealth over time and doesn't need as much effort as you might expect.
Earning from stocks doesn't involve trading frequently, staring at a screen all day, or obsessing over stock prices. Typically, the real money in investing comes from three main things:
The top way to earn money in stocks isn't by trading a lot. It's about a method called "buying and holding." This approach became famous from Benjamin Graham, known as the father of value investing, and is used by successful investors like Warren Buffett.
As someone investing in stocks, aim for overall gains and think about investing for the long haul. This means you should:
If you've picked good, solid companies, the value of your stocks will likely go up as time passes. For instance, take a look at the prices of four well-known stocks below to see how they grew over five years.
Famous investors like Warren Buffett and Charlie Munger have made a lot of their wealth by holding onto stocks and businesses for many years. Regular people have also done the same, investing small amounts of money for the long term and gaining huge wealth.
For instance, Anne Scheiber, a retired IRS agent, turned ₹5,000 into a ₹22 million portfolio over 50 years. Similarly, Grace Groner, a retired secretary, made a ₹7 million stock portfolio from just three ₹60 shares she bought in 1935.
The stock market is hard to predict, and trying to frequently buy and sell to outperform the market usually doesn't work well over time. It's better to become a successful investor by picking good stocks and keeping them for many years.
To earn from the stock market, it's crucial to grasp how owning stocks functions. This knowledge helps in making wise investment choices.
When you buy a stock, you're buying a part of a company. Here's an example to illustrate:
Harrison Fudge Company, a made-up business, makes ₹10 million in sales and earns ₹1 million as profit. To gather funds for growing the business, the founders asked a bank to sell shares to the public for the first time (IPO). The bank made 440,000 shares and sold them at ₹25 per share.
If the company's managers boost sales by five times in the coming years, your share of profits could also rise by five times. This could turn Harrison Fudge Company into a valuable investment for the long run.
When you have stocks in a company, you might not directly receive the per-share profits that are yours. The management and the board of directors can decide what to do with those profits, and their decisions will affect your investments.
Which strategy works best for you as an owner depends on how effectively the company's management can grow your money by reinvesting it. Sometimes, giving out cash dividends might not be the best choice because those funds could be used by the company for more growth, boosting the value of your stocks.
However, for well-established companies that don’t need significant expansion, they might prefer paying dividends to their shareholders.
Good investments can follow different paths. For instance, Berkshire Hathaway doesn't pay cash dividends, while U.S. Bancorp gives back more than 80% of its profits to shareholders each year through dividends and buying back its own stock. Despite these differences, both have the potential to be valuable holdings at the right price.
To know if a stock is a good investment, it's important to look at how the company manages its money and where it puts its assets.
When you grasp the workings of stocks, you'll realize that your wealth mainly grows from:
Suppose a company with a ₹10 stock price increases by 20% every year for 10 years because of business growth and buying back shares. In that case, the stock might reach around ₹620 per share after a decade, assuming the Wall Street market keeps a similar price-to-earnings ratio.
Dividends: When a company shares its profits with you through dividends, you get the money either as cash through a check, direct deposit to your brokerage, checking, or savings account, or as more shares added to your investment automatically.
With a DRIP (dividend reinvestment plan), you can use your dividends to buy more shares in the company. This helps you buy even small parts of shares and grow your stock holdings over time.
Sometimes, during market bubbles, you might sell your shares for a higher price than what the company is actually worth, making a profit. Also, if you face an unexpected emergency and need cash, having stocks to sell can help financially.
But in the end, the money you make depends on how much profit the businesses you invest in make. It's smart to pick your stocks wisely and keep them for a long time if you want to build wealth steadily.
You can purchase stocks using full-service or online stockbrokers or directly from the company. Start by setting up an account with one of these options and link it to your bank account. After that, you can start researching and buying stocks.
You can begin investing in stocks with a small amount of money. Several online brokerages let you create an account without needing a minimum deposit, and some stocks cost as low as ₹10 per share. However, remember that a low-priced stock might not always be a good choice. Make sure to research before you start purchasing.
