Investing in the stock market has historically been one of the easiest and most effective ways to build wealth. You don’t need a large sum of money to get started and it’s possible to build a healthy portfolio of profitable stocks relatively quickly.
When you buy stocks, you’re actually buying a share of ownership in a company that has been publicly listed on the stock exchange. The objective is to invest in stocks that will make you money over the long term.
Ways to Invest in Stocks
If you’re like most people, your idea of investing in stocks might be to buy cheap and sell when the price goes up. You might have images of stock investors sitting glued to a computer screen all day obsessing about the Dow Jones Industrial Average of the S&P500 in the hopes of picking a winner
Share trading can certainly be profitable sometimes, but it’s not always a guaranteed way to build wealth. It’s also a form of speculation, as you can’t always pick a guaranteed profit maker.
Even if you do pick a stock that increases in value and you’ve sold it, you can’t generate any further profits from it. The trade is complete, so it’s back to searching for another winner. There’s also the risk of the share prices falling, so you could end up losing money on your trade.
Alternatively, successful stock investors know that buying value stocks that pay dividends. Some companies choose to share their profits with shareholders in the form of dividend payments.
Some investors choose to accept their dividend payments in cash to supplement their incomes. However, while you’re in wealth creation mode, you might choose to reinvest your dividends into buying new shares in the company.
Companies that offer a dividend reinvestment plan, or DRIP, offer shareholders the option of receiving their dividend payments in the form of additional shares. Those new stocks are added to your portfolio automatically without you having to pay any brokerage fees, so they become an automated way to grow your wealth over time.
Along with receiving added shares in the company over time, you also have the advantage of the share price potentially increasing. The combination of both things is how successful investors build wealth through stocks.
Choosing the Right Shares
Nobody has a crystal ball that can accurately predict which stocks are guaranteed to increase in price. However, it is possible to keep an eye on what various sectors of the market are doing.
For example, the financial sector might show signs of growth after banking policy changes are introduced. Likewise, the energy sector might be subject to increases in share prices after news of a shale oil boom is published.
Investing in the energy sector can be a smart move for many beginning investors, as the prices tend to be aligned with supply and demand. For example, when factors emerge that increase the supply of oil, prices tend to be driven down. However, when factors that increase demand for oil products emerge, prices are driven up.
Narrowing Your Focus
Once you’ve narrowed down a particular sector that shows signs of potential strength, it’s time to narrow your focus to choose the individual shares you want to purchase. There is a range of different ways investors use to determine the right stocks to add to their share portfolios.
Some assess the strengths of each individual company and the management and Board of Directors behind the company’s operations. Others scrutinize the financial state of the company’s operations to determine whether it’s in a great position to continue trading profitably over the long term.
Then there are investors who pick their stocks solely on the dividend yield they expect to receive. To dividend investors, the daily fluctuations of the stock market mean little, as they intend to hold the stock over the long term anyway.
Some people prefer to base their investment choices on the companies that institutional investors or hedge funds show faith in. An institutional investor is an organization that trades stocks in large quantities on behalf of its members, such as a retirement fund or mutual fund.
The NASDAQ website offers listings that show exactly what percentage of company shares are owned by institutional investors. For example, an energy company such as Occidental Petroleum is 82.88% owned by institutional investors. By comparison, institutional organizations own only 52% of Exxon Mobil common shares.
Of course, if you’re aiming squarely at the energy sector, you can spread your risk by investing in oil exploration and drilling companies as well as natural gas companies. The factors that cause one type of energy to increase in demand can often cause the other to fall, and vice versa.
The key to building wealth through energy stocks is to follow the market and choose the energy companies that are poised for long-term operations. Reinvest the dividend yields to increase your stock holdings over time and be prepared to hold onto your stocks for the long term.
Ruby Tomlinson shares her knowledge on investing wisely for the future. She starting building her portfolio when she was 30 and hasn’t looked back. She now helps others get started.