Now let’s see how you can invest in the stock market.
The stock market is the place where you can buy and sell your shares and bonds (we’ll talk about bonds later).
When you buy a company’s stock through the stock market, you essentially become one of the owners (along with other investors) of the company.
Investors buy the individual shares because they believe that the price of the shares will rise, which means that they can make a profit when they sell them. They can make huge gains and sometimes a 100% return.
However, if the share price does not rise and they sell their investment to reduce further losses, they will lose money. You can also earn an income from the shares if the company chooses to pay dividends (by sharing profits with their investors).
When an individual wants to invest in a company but does not just want to buy shares of a company, he can invest in a fund.
A fund collects money from many investors to buy shares of different companies, allowing investors to gain exposure and manage risk.
Funds help reduce the risk of putting all eggs in one basket. The performance of the fund depends on the performance of the companies invested through the fund. Funds can be divided into two categories: assets and liabilities.
Active. An active fund is managed by a fund manager. A fund manager buys shares in several companies which, in their opinion, perform better than companies in an index. When you buy an active fund, you usually pay a commission of 1% or more.
Passive. A passive fund does not have a fund manager. Instead, a passive fund usually follows an index. The fund invests in the same companies that make up an index with the aim of obtaining the same returns. An index is used as a statistical measure of a segment of the stock market, for example, the Standard & Poor’s 500 (S&P 500) index is an index of 500 shares, seen as an indication of the strength of U.S. stocks. As there is no fund manager to pay, a passive fund charges lower fees.
Exchange-traded funds (ETFs) are a separate category.
An exchange-traded fund is similar to an indexed fund in that it usually invests in companies in an index, but can be traded on an exchange, such as shares. What attracts investors to use an ETF compared to an indexed fund is that, like shares, ETFs are quoted continuously throughout the day, which allows investors to profit from short-term movements.
People invest money in funds and shares to gain from capital growth and/or earn income.
Many funds, or shares, allow you to choose between achieving capital growth (growth of the initial investment) and earning a regular income (receiving dividends with the capital invested and remaining at approximately the same value).
If you are starting to invest and want to grow your capital, it makes sense to invest in growth products, i.e. those that do not pay dividends. However, just because you have chosen a growth or income approach does not mean that you cannot change your mind.
If your growing investment has produced exceptional results, every year.
If you have chosen to invest in stocks or funds that pay dividends, you can always reinvest the dividends each year in new stocks or funds to grow your portfolio instead of taking the dividends as income.
For all the investments I have written to you a rule of thumb is to commit to keep them for at least five years. This is enough time to skip some market sinking.
If you need to access your money first, consider investing in a different asset that you will find out by continuing reading.