This article explains very briefly how the money is earned from the stock market, so you can be clear what your basic expectations should be towards trading on the stock exchange.
How is money earned from the stock market?
As an investor, by buying single shares, you are buying small tiny pieces of businesses. So, pick the roses instead of the weeds. Therefore, the aim is to only buy the greatest companies to invest your money in at reasonable prices. Here is the list of 22 The Greatest Companies to Invest Your Money In. Set up the right system, and give it time waiting for growth while collecting dividends.
By buying shares of stock in public limited companies being traded on the stock market, you expect to earn money in two ways – regularly and continuously from Dividends and as a one-time payment from Capital Gain upon the sale of shares.
So, buying shares in a public limited company can generate earnings in two ways:
1. Dividends. Earned when a part of the company’s Net Profit After Interest and TAX is paid out to shareholders. Companies pay dividends annually, quarterly or monthly to shareholders unless all profits are retained, profits are too low or losses were made.
2. Capital gain. Made by the share price rising. Share price is a quoted price of one share traded by institutions and individuals on the stock exchange.
Therefore, the first objective of business owners (shareholders) is to receive regular dividends, and the second objective is to see market value of shares increase, so we can earn capital gain when we sell those shares.
How much money can be earned from the stock market?
As an investor, be a realist who buys from pessimists and sells to optimists.
Remember to always have realistic expectations what you can earn from the stock market:
1. Dividends – 2.5%. Historically, stocks can return from investment 2.5% annual Dividend Yield on average. Broadly, Dividend Yield will vary from approximately 0.5% to 6%. While some companies do not pay any dividends at all, some other companies pay as much as 8% or 10%.
2. Capital Gain – 7%. Historically, stocks have generated capital gains of 7% annual growth on average. This is the average annual growth rate of the stock market throughout the last, let’s say, 100 years. However, in the last 10 years, the growth rate was at around 10%-15%. This is because companies have become better at earning profits. This is also because managers are better at generating sales revenue and controlling the costs. Also, businesses are better and better are reinvesting profits as well as investing shareholders’ money and borrowed capital
In summary, the appropriate expectations towards investing on the stock market would be to buy great companies at low prices. Then, sit tightly to keep on collecting decent dividends of around 2.5% per year to pay for your living expenses while observing the share price to grow by around 10% per year. Finally, sell the shares (if you have to) with satisfactory capital gains, or keep the shares (if you do not have to sell) forever. Period.
