A stock market investment is the purchase of financial instruments that are available for trading. The purpose of these types of investments is to supply companies with cash and to provide an opportunity for investors to earn money on their capital. There are two revenue streams for investors: share price increases and dividends.
Stocks, or shares in a company, are purchased based on the open market rate, which reflects the perceived value of the company. If the share price increases, investors can sell their stocks at the higher value and make money from their stock market investment. If the company is profitable, they pay dividends to their shareholders each year. The amount of money you receive is based on the number of shares you hold and the dividend rate. Both values are provided in the annual financial statements.
When you are looking to make a stock market investment, it is important to clearly define your goals and long-term strategy. Over a 20-year span, the stock market has historically provided an average 25% rate of return on investment. The important points to note are the long time span and that the rate of return is an average. Past behavior is not necessarily a good predictor of future activity.
To succeed in stock marketing investing, identify your goals clearly, select a strategy, and stick to it. Make a stock market investment with a clearly defined upper and lower limit. As soon as the stock hits either limit, sell at least a portion of your stocks. This is an easy way to manage your investment. Any gains on the stock are translated into actual cash and any losses are minimized.
Use only risk capital to invest in the stock market. Risk capital is money specifically set aside for investment that you can afford to lose. If you do not have risk capital, do not invest in the stock market. There is a very real risk of losing your money.
Diversify or spread your stock market investments across several industries. Do not put on all your money into one company or industry. The purpose of this is to minimize any losses due to the cyclical nature of the stock market. Company stock values fluctuate, just as the economy does.
Investing in different companies in the same industry is not diversifying. It must be across unrelated industries. A good example is computer technology, mining, and food services. These industries are not interrelated and issues that affect one area do not affect them all.
