Is Making Money From Stocks Just a Fantasy?

Can a common man earn profits by investing in stocks? No matter what people say investing in stocks requires some basic understanding of financials. Otherwise investing in stocks is almost like shooting in dark hoping to hit the target. But careful and informed investors hit the bulls eye as they have night vision goggles (financial intelligence). In order to have those night vision goggles we must increase our investing concepts. Fundamental analysis of stocks is one such concept that will help investors to make sure-sort profits in stock market. Investing and making money from stock investment is not just a fantasy, it is possible if investors have developed investing concepts.

Income from stocks

It is important for investors to know that how stocks can make money for them. In principal stocks can make money in two ways (1) by dividends and (2) by capital appreciation. So superficially we can say that we shall buy those stocks which has future capabilities of earning dividends for us and also if we sell the stocks it shall be sold with some margin (capital appreciation). Suppose I bought a share at $100 and held it for a year. During this tenure of 1 year it earned me a dividend of $4 and when I sold my holdings, my capital appreciated from $100 to $114. So in a matter of one year my income from my stocks holdings was $4 (as dividends) and $14 (as capital appreciation). In total the total return was 18% per annum. No matter how big or complicated investment you are going to make in times to come, this income scheme from stocks will be valid. The rule, before buying any stocks always ask these two questions, (1) how much dividend this stock is going to make and (2) how much appreciation my capital is going to see during my holding time.

Inherent benefits of investing

I have been personally investing in stocks, mutual funds and debt schemes since few years now. I have realized that no matter whether my investments has made profits or not they have always yielded only benefits for me. On thing is a fact that if you are not investing your money you will end up spending it anyways. So if you are investing you are actually not spending but saving. The advantage of saving your money this way is that you has tremendous possibility of capital appreciation. Stocks and equity linked mutual funds gives us this advantage of fast multiplication of capital. But even if your capital has not appreciated much (may be they are at some loss) still it is better that 100% getting spent. Once I was surprised to see that just Rs 2500 savings each month for next 3 years (in SIP) yielded savings of more than Rs 95000 (though it was at loss). At that time I so desperately needed money for my family that I couldn't stop thanking myself for doing that SIP. That was my most favored savings until that date.

Conclusion

So many times I have been asked by my readers that how can I double my money in one year. To such curious people I will ask a simple question, do you know what is profit margin with which majority of companies in this world operate? The average margin is 10%. out of all majority operate between 5% to 7% and only a handful of some blue chip stocks has higher margins. If a company is operating with 10% margin then it means the company is doubling its money only after 7 years. So If companies themselves are making profits at such slow rate then how can we expect to double our money I just one years. As an informed investors it most important even for us to set realistic targets (of growth) for our money. On an average if our portfolio is increasing at a speed of 7% to 10% per annum then we shall consider it reasonable.