Having enough cash to thrive is something that we all seem to worry about almost on a constant basis. Everyone wants to make sure that they’re comfortable in their lives. However, with an unpredictable economy, and a less than perfect income, you might find yourself relying on credit and borrowing more than you’d like.
Fortunately, the quicker you start investing in opportunities for your future, the more you can begin to build a strategy that supports your comfort and ongoing success in the long-term. One of the easiest ways to get started with investing, is to get involved in the stock market. With stocks, there are three key ways that an investor can make money:
- First, you might collect money from dividends paid by the business to all investors.
- You can share in a proportional growth of the underlying earnings for the business per share.
- You may receive more or less money for the extra money a company generates based on the fear or optimism of the economy, through the price-to-earnings ratio.
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Earning Money from Stocks
For some companies, the dividend yield that you get from investing in stocks will be substantial enough to make a difference to your regular income. On the other hand, there are also companies out there that don’t offer huge dividends, simply because the return that you get from the growth of the business is enough to give you all the extra income you might need.
One of the most complicated things for investors to understand, is the value of the third component of earning opportunities: the valuation multiple. The project a future return on your stock market investments, you need to understand how to analyse all three earning solutions, from initial dividend yield to growth in intrinsic value, to earnings per share. You’ll also have to access a basic understanding of how things like the price-to-earnings ratio works.
The historical Price to Earnings ratio in the stock market usually stands at around 14.10, with the S&P valued at a rate of around 14.07. This indicates that an investor that buys and holds a low-cost index fund in the S&P 500 for the next 25 years will probably earn about 7% compounded interest per 5 year. This means that every $10,000 you invested before tax would turn into about $54,274. That’s a huge bonus on whatever you’re investing.
Sometimes, you may even be able to get away without paying any tax on your wealth-building strategy altogether. For instance, if you’re holding your securities through an account that comes with tax advantages like a Roth IRA, this would be the case.
Over the next 50 or so years, just a $10,000 investment could lead to huge wins for your retirement fund, even in inflation-adjusted terms. Put another way, if a 30-year-old investor put around $100,000 of their cash into an S&P 500 index fund with a tax-advantaged account, they’d get a great shot of earning up to $3 million in purchasing power by the time they reach retirement age.
How to Start Investing Your Money
For a lot of people, investing, whether it’s in stocks, securities, or something else entirely, can seem like a daunting and overwhelming concept. It’s difficult to know which businesses you should put your money into, and which you should ignore. Additionally, once you decide to get started with the stock market, it’s never 100% certain how much risk you should be taking with your cash. Some people think that it’s important to take high risks to get higher rewards. Other people believe that it’s crucial to keep your risk low and earn over the long-term.
If you’re a beginner in the stock market, the best thing you can do is give yourself time to learn. Speak to an expert about finding your way around the stock market and what you need to know to make the right decisions. Consider asking for a broker to make some of your investments for you and tell you why he or she made those decisions. You can even use paper trading accounts to learn more about stocks on the front lines.
Whatever you do, make sure that you never invest more in the stock market than you can afford to lose. Though it’s easy to get excited and carried away when you first launch your new account, it’s important to remember that investments aren’t guarantees of wealth. There are always risks that need to be addressed.