Investing in stocks can be one of the most effective ways to grow your wealth over time. While stocks can be volatile in the short term, in the long run they tend to provide much higher returns than other assets such as government bonds and cash savings.Interested in learning more about stocks and how to invest in them? This guide to investing in stocks is a great place to start. In this guide, we’ll walk you through the basics of stock investing and explain how you can invest in stocks through Coinam Academy.
Stocks, or shares as they are often called, are investments that represent ownership in a company.
Companies issue stocks in order to raise money so that they can grow and develop. When you buy a stock, you essentially become a part-owner of the underlying company and are entitled to a share of its profits.
Stocks are traded on stock exchanges such as the New York Stock Exchange (NYSE), the NASDAQ, the London Stock Exchange (LSE), and the Australian Securities Exchange (ASX). A stock exchange acts like a market where buyers of stocks can connect with sellers. To place a trade, you need an investment account with a stock broker or investment platform.
At Coinam Academy, investing in stocks is a straightforward process. Coinam Academy’s platform is easy to use and offers zero commissions as well as low minimum investments. This means that investing in stocks is something that anyone can do.
Investing in stocks can be a great way to grow your wealth over time. Historically, stocks have delivered excellent returns to investors over the long term.
For example, since the inception of the S&P 500 index (a stock market index that is composed of 500 large US companies) in 1926, it has generated annual returns of around 10% on average. This is a much higher return than the returns generated by other assets such as government bonds and cash savings.
It’s important to realise that not every stock performs this well. That level of return is an average across all stocks in the index.It’s also important to understand that stocks don’t rise in a straight line. Stocks prices can move down as well as up and stocks tend to experience periods of bad performance every now and then.Don’t let this put you off, though. Time and time again, studies have shown that stocks are one of the best long-term investments you can make.
The terms ‘investing’ and ‘trading’ are often used interchangeably. However, there are key differences between the two financial strategies. Here’s a look at how the two strategies differ.
The goal of investing in stocks is generally to build wealth over the long term.
Investors will often hold stocks for years, or even decades, with the aim of generating substantial profits from both rising stock prices and dividends over time.
Investors tend to ride out periods of underperformance, with the expectation that stocks will eventually rebound and any short-term losses will be recovered.
The goal of stock trading is to generate short-term profits.
Traders hold stocks for a much shorter period of time than investors, often buying and selling within weeks, days, or even hours. Instead of focusing on the company’s long-term prospects like investors do, traders focus on which direction the stock is likely to head in next and try to profit from that move.
Traders often use stop-loss orders to automatically close out losing trades at a predetermined price level in order to protect their capital.
Both investors and traders seek to profit from the stock market, however, they pursue this goal in different ways.
Investing is a ‘buy and hold’ long-term strategy, while trading is a ‘buy to sell’ short-term strategy.
| Investing | Trading | |
|---|---|---|
| Timeframe | Medium to long term | Short term |
| Profits | From rising stock prices and dividends | From rising and falling stock prices |
| Instrument | Stocks | Stocks or Contracts For Difference (CFDs) |
| Risk | Limited to initial investment | Potentially magnified by CFD leverage |
There are three main ways to make money from stocks.
Rising stock prices
The first way is through increases in stock prices. If you buy a stock and its price rises, you can sell it for a profit.
For example, if you buy one Amazon share when the stock is trading at $2,000 and it rises to $2,200, you can sell it for a $200 profit.
This is called generating a capital gain.
Dividends
The second way you can make money from stocks is through dividends.
Dividends are cash payments that some companies pay to their investors out of their profits. Not all companies pay dividends but many well-established companies do.
One example of a dividend-paying company is McDonalds. In 2019, it paid its investors a total of $4.73 per share in dividends.
McDonalds’ dividend history
Tip: Dividend payments can often seem insignificant, however, they shouldn’t be ignored. Many studies have shown that, over time, dividends tend to make up a significant proportion of overall stock market returns.