Investing is a way of putting money to work for you. By investing money regularly, you may be able to increase it many times over time. This is why it is important to start investing as early as possible and as soon as you have money saved up. The stock market is a good place to start for new investors. In this article, we explain why people invest in stocks, what investing entails, and how people can make money from shares.
What is a share?
A single share represents a unit of ownership in a company. Public companies such as Apple, Tesla and Microsoft are listed on the stock market or stock exchange. When people buy shares in one of these companies – even a very small number of shares – then they own a small part of that company.
To access the stock exchange and start investing or trading, investors typically need to work with a third party, known as a broker, such as Saxo capital markets Singapore, to conduct the actual transaction of buying and selling shares.
How can people make money from shares?
People aim to potentially make money from investing in shares through one or both of the following ways:
An increase in share price: Usually known as ‘capital growth’ or ‘capital gain’, all this means is that investors make money by buying their shares for one price and selling them for a higher price. Conversely, it is important to remember that if the share price falls below the amount an investor has paid and they sell their shares at a lower price, they would wind up losing money.
A share in the company’s profits: Usually known as ‘dividends’, these payments are a portion of company profits paid out to shareholders, usually twice a year. Companies do not have to pay dividends, but many of them see it as a way of returning earnings to their shareholders.
How to start investing
Define risk tolerance level
Tolerance for risk is the chance that a trader may lose money while investing. This is important because stocks are categorised in various ways, such as large capitalisation stocks, small-cap stocks, aggressive growth stocks, and value stocks. They all have various levels of risk. So once a trader determines their risk tolerance, they can set their investment sights on the stocks that complement it.
Decide on investment goals
Traders should also figure out their investment goals. In fact, when opening a brokerage account, an online broker will typically ask traders about their investment goals (and the aforementioned level of risk they are willing to take).
If a trader is just beginning their career, an investment goal could be to increase the amount of money in their trading account. If they are older, they may want to generate income to grow and protect their wealth in the long-term.
An investor’s investment goals may include buying a house, funding their retirement, or saving for tuition. Goals can change over time. Investors should make sure they define and review these goals periodically so they can keep their focus on achieving them.
Determine investing style
Some investors want to take an active hand in managing their investments, while others prefer to set it aside and forget about it. Preferences may change in the future, but it is best if investors decide on an approach to get started.
If an investor is confident about their investing knowledge and capability, they can manage their investing and financial portfolio all on their own. Traditional online brokers typically allow people to invest in stocks, bonds, Exchange-Traded Funds (ETFs), index funds, and mutual funds.
An experienced broker or financial advisor can help traders make investment decisions, monitor their portfolios, and make changes to them. This is a good option for beginners who understand the importance of investing but may want an expert to help them do it instead.
A robo-advisor is an automated, hands-off option that usually costs less than working with a broker or financial advisor. Once a robo-advisor program has a trader’s goals, risk tolerance level, and other details, it automatically invests for the investor.
Learn to diversify and reduce risk
Diversification is an important investment concept for investors to understand. In a nutshell, by investing in a range of different assets, or diversifying, traders can reduce the risk that one investment’s performance can severely hurt the return of their overall investment portfolio. Basically, traders should not put all their eggs in one basket.
It can be difficult to diversify when investing in individual stocks if the budget is limited. This can lead to greater risk for the investor in the long run.
As such, other financial instruments, such as mutual funds and ETFs, can help. Both types of funds tend to own a large number of stocks and other investments at the same time. This makes them a more diversified option than simply investing in a single stock.
Why should people invest in stocks?
Below, we will take a look at some reasons why people invest in stocks. Make sure to keep reading below to learn more.
Potentially grow money
This is the simplest reason to invest and is often at the core of why people usually buy stocks. When done right, it is possible to grow the money being invested anywhere from 7%-10% per year over the long term. In fact, investing in stocks is a common strategy for wealth accumulation and long-term financial goals, such as retirement planning. By consistently investing in stocks over time, individuals can take advantage of compounding returns, where their investment gains are reinvested and can generate further growth. This long-term approach to investing in stocks can help individuals build wealth and secure their financial future.
Historically, stocks have provided higher returns compared to other investment options over the long term. By investing in stocks, individuals can participate in the growth and success of companies and potentially benefit from capital appreciation. As companies grow and generate profit, the value of their stocks may increase, leading to potential gains for investors.
Ownership and share in profits
When individuals invest in stocks, they become partial owners of the company. Owning stocks gives investors the opportunity to share in the profits of the company through dividends. Many companies distribute a portion of their profits to shareholders in the form of regular dividends. By investing in stocks, individuals can earn a regular income stream from dividend payments.
Investing in stocks allows individuals to diversify their investment portfolios. By holding a mix of different stocks across various sectors and geographies, investors can spread their risk and reduce exposure to any single company or industry. Diversification helps protect against potential losses and can potentially enhance overall portfolio performance as well.
Flexibility and liquidity
Stocks offer flexibility and liquidity, providing investors with the ability to buy or sell shares relatively easily. Stock markets provide a highly liquid market where buyers and sellers can transact quickly at transparent prices. This liquidity allows investors to access their investments and adjust their portfolios as needed.
It is important to note that investing in stocks comes with risks, including the potential for loss of capital. Stock prices can be volatile, and individual companies may face challenges or experience a decline in values. Therefore, individuals should carefully consider their risk tolerance, financial goals, and time horizon before investing in stocks. Conducting thorough research, seeking guidance from financial professionals, and diversifying investments are prudent strategies to mitigate risks and maximise potential returns.