101-05 Investing in the Stock Market

Various strategies can be used to make money in the stock markets. Many choose to invest in stocks that they believe will increase in value over time. Others may invest in companies that pay regular dividends, providing a steady income stream. Still, others may use more speculative strategies, such as day trading or short selling.

Whatever strategy you choose, it is important to remember that the stock market can be volatile. Prices can go up and down quickly, and there is always the risk of losing money. It is important to do your research and only invest the amount of money you are comfortable with losing.

Course 101: Introduction to Investing
101-04 Investing in the Stock Market

Investing in the Stock Market

The stock market provides many ways to invest, including investing for dividends, penny stocks, blue chips, small-capitalization stocks, exchange-traded funds (ETFs), mutual funds, hedge funds, and real estate investment trusts (REITS).

This section overviews the terminology and the vehicles available to invest in.

Buying Stocks for Growth

Most people associate the stock market with the rise and fall of stock prices. And that is certainly a major aspect. The appreciation of a stock’s price is the most common form of profiting from the stock market.

You purchase a stock at $10 and sell it for $12; this equates to a 20% profit, excluding transaction costs and taxes on the gains.

Relying on the profit source to be the stock price means you would inevitably want to invest in growth stocks, i.e., stocks experiencing a price appreciation at or better than the market average.

Growth stocks may typically be companies that are relatively new to the market and have carved out a profitable niche growing rapidly. The factors to consider in growth stocks are:

  • How long will the growth last?
  • Can the company turn fast growth into profits?
  • Can the company dominate the market in its niche?
  • How experienced is the management team?

In addition to considering price growth, one should consider any dividends a company may pay.

Buying Value Stocks

Value investing is both a philosophy and a strategy of investment. The philosophy is that an asset’s value is its most important characteristic. The strategy is that the market cannot properly value stocks, but well-informed investors can.

Value gurus like Warren Buffett believe most stocks are either overvalued or undervalued.

Buying Stocks for Dividends

Of the 5800+ stocks currently available to purchase on the major U.S. indices, circa 2800 companies currently offer a dividend payout.

A dividend is an offer from the company to pay out a portion of its income (after-tax profits) to its shareholders.

These companies tend to be well established with a stable income stream, enabling them to offer a constant dividend. The dividend is essentially a reward to the shareholder for holding the stock.

Types of Dividend

  • Regular Cash dividend, the most common type of dividend payment, is usually released quarterly.
  • The extra dividend is a special dividend, usually a large one-off payment to shareholders.
  • Liquidating dividends are usually paid if there are any left-over or allocated funds during the company’s liquidation.

Dividend Payment

The dividend payment is usually expressed in dollars per share. If you own 100 shares of a company whose stock price is $200, if the company pays out $5 per share, then I will receive 100 X $5 = a $500 payment. Usually, this is distributed every quarter, meaning I will receive $125 per quarter.

Dividend Payment = Number of Shares X Payment per Share

Dividend Yield

Here is an example of the dividend yield. Joe owns 1000 shares of ABC Company at $10 per share. ABC pays out a regular dividend of $0.50 per share. As a single share of the company is worth $10, $0.50 equates to a dividend yield of 5%.

Dividend Yield = Annual Dividend Paid / Stock Price.

This 5% is what you earn on your money regardless of stock price growth. Of course, if the stock price deteriorates during the period in which you hold the stock, your net profit may reduce. For example, you make a 5% profit in terms of dividend yield, yet the stock price has depreciated 5%. This means your net profit if you were to sell would be zero.

How to Calculate Stock Dividend Yield With Easy Examples

Dividend Payout Ratio

The dividend payout ratio is the proportion of the Earnings per share paid out in dividends. For example, if a company earns $2.50 in earnings for every outstanding share and pays out $0.50 per share in dividends, the dividend payout ratio is 20%.

Dividend Payout Ratio = Dividends per Share / Earnings per Share

Ex-Dividend Date

This is the date two business days prior to when the dividend payment is scheduled.

For example, if you purchase a stock on April 24th and the company announces the dividend payment date is April 30th, you will be entitled to the dividend. However, if you purchased the stock on April 29th, the previous stock owner will receive the dividend.

What kind of dividend payouts can you expect?

Of the 5000+ stocks currently on the major U.S. Indices, approximately 50% of the companies pay dividends. Here are some interesting facts.

  • There are 2800 companies paying a dividend
  • Less than 0.5% payout a dividend of more than 10%
  • 25% of the companies pay out a dividend yield of between 5% and 10%
  • Less than 1% of companies pay a dividend of less than 1%
  • This means approximately 74% of the companies pay between 1% and 5%

A reasonable expectation is that you should receive a dividend of around 5%.

Dividends can be a great way to generate a steady income from stocks, but beware, if a stock price is rapidly falling and the company is in trouble, your net profit may not be as high as you expect.

6 Steps to Build Your Dividend Stock Screener & Strategy

How to invest in real estate in the stock market

There are a few ways to invest in real estate in the stock market. One way is to purchase shares of a real estate investment trust (REIT). A REIT is a company that owns and operates income-producing real estate, such as apartments, shopping centers, office buildings, warehouses, and hotels. Investors in REITs receive a share of the income generated by the underlying properties held by the trust.

Another way to invest in real estate through the stock market is by buying shares of companies that own and operate real estate. These companies are known as real estate operating companies or REOCs. Companies that fall into this category include AvalonBay Communities (NYSE: AVB), Equity Residential (NYSE: EQR), and Camden Property Trust (NYSE: CPT).

Investors can also purchase exchange-traded funds that focus on the real estate sector. One of the largest and most popular real estate ETFs is the iShares US Real Estate ETF (NYSEARCA: IYR). This fund provides exposure to a broad basket of REITs and real estate operating companies.

Finally, investors can directly purchase shares of individual properties through a process known as property crowdfunding. Property crowdfunding platforms, such as RealtyMogul.com and Fundrise.com, allow investors to pool their money together to purchase a property. Once the property is purchased, the platform will manage the asset and distribute the income to investors.

Each method has its risks and rewards, so it’s important to do your research before deciding which one is right for you.

What are penny stocks?

Penny stocks are shares of small companies that trade at low prices, typically below $5 per share. They are often highly volatile and risky, and most financial experts recommend avoiding them.

Why should you avoid Penny Stocks?

There are a few reasons why penny stocks are so risky. First, because they trade at such low prices, even a small change in the stock price can result in a large percentage gain or loss. This makes them very volatile and difficult to predict. Second, penny stocks are often issued by companies with little history or financial stability, making them more likely to fail. Finally, it can be very difficult to sell penny stocks, as there is often little demand for them.

For these reasons, most financial experts recommend avoiding penny stocks altogether.

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