People often have no idea that how the stock markets makes them money. Well, here is an explanation.
There are two ways to earn in the stock market.
When a combined process of buying and selling results in a profit, it is known as earning through trade. This happens when we buy at a certain price and in due time the stock price rises. This stock can then be sold at a profit. This is also known as capital appreciation.
Money through trade can also be earned while going short, i.e. selling first and buying later when the price of the stock falls. This also results in a profit.
Dividends are another way of earning money in the stock markets apart from capital appreciation. A company distributes its partial profits to its shareholders which is known as Dividend. Dividends are paid monthly, quarterly, biannually or annually and is completely dependent on the company.
The company can also decide not to pay if their policies suggest to do so, as they are not obligated to pay dividends. But, since it is considered as a thank you gesture towards the investors many companies do pay regular dividends to keep the investors in good faith.
However, not everyone who buys a company’s stock is entitled to get its dividends. To receive dividends the person must be a shareholder of the company for a minimum set frame of time. The time frame can vary from company to company.
This is done to make sure traders who just buy and sell for instantaneous capital gains are not rewarded as they are not invested in a company’s future.
Difference in both the ways:
- Earning through trade means you
just get liquid assets i.e. cash in
hand which can be spent or invested as and when required.
Earning through dividend, on the other hand has an added benefit of remaining a shareholder and if price of the stock rises, the shareholder’s net worth also increases.
Note: Large net worth does not mean having large amounts of cash (liquid asset) to spend. It just shows high value, because if and once sold, the person will have large liquid assets.
- A trader earns through capital appreciation and an investor earns through dividends. But an investor can also earn through capital appreciation if the stocks are sold at a higher price after a considerable span of time but, doing so will obviously stop the dividend earning.
- A trader can have losses if the stock’s price falls after buying. An investor on the other hand will earn through dividends even though in portfolio the net worth would have decreased.
Which way to choose?
The answer is it depends. It depends on the person and his/her preference to becoming a Trader or an Investor. If the goal is to get rich, then through conscious learning and disciplined efforts the goal can be achieved both by an investor and a trader.
Need examples? Sure!
There are many more successful investors and traders, and it really depends on you to choose which style is better suited to you and then work hard to learn and master it.
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