Stocks and Dividends. You instantly think of red and green arrows and a bunch of numbers. For people that don't like numbers this can be very intimidating! I will attempt to strip down all the complicated layers for now and explain just the basic concepts for the beginners.
What is a Stock?
A stock is put simply a part or percentage of a business. When someone says that they own stocks they will generally be indicating that they have part ownership in multiple business. The term stock is also linked to the word shares. When someone says they have shares they are generally saying that they have part ownership in one business. There is an ongoing debate between the two terms but essentially they both mean part owning a business/ multiple business's.
Where it gets semi complicated is understanding that different listed business's have different priced stocks. This comes down to the value of the business and how it is split. For example take Google, Google has 15,000,000 shares where each share is worth around $1200!! So for $1,200 you can say you own Google! Or at least 0.000007% of it! Now as we know Google is one of the most prestigious, profitable business's so that is why their single share price is so high. There are a huge variety of business's listed that have share price ranging from thousands like google to a few dollars!
Why do business's enter the stock market and sell parts of their business?
Quick answer for you! To raise capital! If you are unsure of what capital is, i will explain quickly. Capital is basically the money/cash/assets that a business has. The value of a business is based on its capital.
Business's enter the stock market to raise capital for the business. Essentially they sell parts of their business for money. For example, an owner owns 100% of a business, they choose to sacrifice 40% of the business converting that into shares. Depending on the value of the business, buyers can choose to buy x amount of shares at x price. Now depending on if they sell the original owner will receive that money in exchange for a percentage of his business. It is then his choice if he wants to reinvest that money back into the business or use it for personal use.
The dangers of stocks
To a beginner and amateur stocks can be very dangerous, pretty much gambling due to their volatility. Losing money is just as easy as gaining money. During trading hours the price of a business's share can increase and decrease at any moment. No one can predict the exact change in numbers and whether the prices will go up and down. That is where it is pretty much gambling.
What is a Dividend?
A dividend is a reward that business's give their owners (shareholders) for owning shares in their business. This comes most commonly in the form of cash payments but is not restricted to just that. Another type of dividend payment can come in the form of reinvesting into the business for more shares. Dividends can be paid out in quarters (every 4 months), half yearly, yearly, per month or irregular payments where there is no set scheduled dividend pay outs. This all depends completely on the business choice. It may not come as a surprise but obviously the more wealthier and profitable a business is the higher their dividend payouts will be.
Two Approaches to the Stock Market
If you are looking to go into the stock market there is two main overall approaches you can take. The long term or short term approach. Over time historically having your money in the stock market will see it grow on average around 10% a year. So as a long term approach if you were to keep your money in the stock market for years on end you would more than not have a safe investment (providing the business you buy shares in is well established and has a good history of growth.) Whereas on the other side of the scale if you're looking at a short term approach the guarantee of growth over time is not given. Without financial and expert advice you are gambling with this approach. This can even apply to well established business's, they can have bad days or even slumps that last months.
Where compound interest comes into play
As mentioned in our post about compound interest, stocks are a great area where the benefits of compounding can be put to use. If you take the safer long term approach as mentioned above you can choose to invest in a well established business that pays cash dividends. You can then choose to reinvest those cash dividends back into more shares meaning more cash dividends! Accompany this snowball affect with an average of 10% return on your money and you can grab the popcorn and just watch your wealth grow!
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