Investing in stocks/shares means buying a unit of ownership in a company. A company can sell its stock to the public to raise money/capital. However, risk comes in as the company does not promise to pay you back the money invested, rather it promises that by using your funds, it will grow, make profits and increase its value and in turn you will profit out of it. In short, when buying a share, you are buying the belief that the value of the company shall increase in the future.
Therefore, if the company keeps its promise and performs well and makes a profit, it might share that with you that profit by paying you a dividend. That’s one way to make money from stocks and is suitable for investors looking to gain a regular source of income from the stocks. Similarly, if the company continues to perform well over time, the prices of its shares may increase giving you an opportunity to sell the shares you own for a price higher than you bought making a profit.
However this is not always the case. Sometimes, the company can perform badly or can be affected by macro-economic and political factors making the company incur losses. As a result, the company may fail to pay out dividends and if the poor performance persists, the price of the stock may go down. This exposes you to the risk of losing money invested. A decrease in a share price below the purchase price is referred to as a fair loss and only crystallizes when you sell the shares. Therefore, it’s important to know your risk tolerance before investing in stocks. Investing in the stock market is not for the faint hearted as market volatility is a must. You need to be able to withstand the volatility without making rush decisions.
But that shouldn’t make you shun away from stocks. Even though investing in shares is risky, it is a more secure and dependable investment because it has a long proven track record, and there’s so much information on stocks. Research has shown that over the years, stocks have done better over time than all other kinds of investments. However, past performance is no indication of future results.
What you need to know is that, investing in stocks doesn’t mean picking winning stocks or timing the market in the short run rather picking good stable stocks and expecting a return in the long run. The stock, price and time are the key ingredients you need to get right if you’re to succeed in the stock market. Therefore, don’t invest in stocks randomly or emotionally, ask for help when selecting stocks from your broker or an investment analyst.
Another thing to consider before investing in stock is that it is best for investors who are investing for the long term. A big mistake most people do is invest in shares with the money you need to use for your short term needs forcing you to sell even when the market is down. The long period of time helps smoothens the market and allows you to comfortably sell when you have achieved your target profits. It will also help reduce your trading costs as you pay brokerage fees & commissions every time you buy or sell shares which can quickly add up.
Lastly, the one rule of thumb when investing in stocks is to remember to diversify, don’t focus on only one stock or industry. No matter how tempting it is or how promising that company looks, don’t put all your eggs in one basket. Nothing is guaranteed in investments. We have witnessed great companies coming down. A good example is KQ. When I started investing, KQ was over Kshs 100 and it looked like it would never come down but here we are, it’s currently selling at Kshs 2. For those starting and have no much money, one of the easiest ways to help you diversify is to invest in an equity fund which is a type of unit trust. Since these unit trusts pool funds, it has the financial muscle to invest in different stocks and in different industries.
Start investing today!