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Making Money In The Stock Market | |||||||||||||||||
As a part owner of a company, naturally you are entitled to receive part of the profits. These profits are paid to you by means of a "dividend", and are generally paid every 6 or 12 months. The size of the dividend cheque that you receive will depend on how many shares you own in the company, and how the directors of the company wish to distribute the profits. Dividends are deemed as income, so are therefore taxable. Some companies already pay the tax for you before they send you the dividends, and some do not. It is highly advisable to speak with your accountant or financial advisor for more information about this, and which way will work best for you given your own circumstances. You will need to pay tax on your trading activities regardless of which way you end up trading, so it is best to seek some good advice early. Traders, as opposed to Investors, are generally only interested in the capital gain aspect and not the dividends. More often than not, they will not hold the shares in their possession long enough to be considered for a dividend payment. You need to be the one holding the shares the day the company close off their books for dividend payments, in order to be the one getting the cheque. It is just like playing the game of musical chairs. Regardless of how long or how short the time that you have owned the shares, if you are the one holding them on the day that the payments are being made, you are the one who gets the payment. You could have just purchased them directly from someone who had owned them all year, yet if they are in your name on that day. You get the payment. This is very important information to remember as it often reflects in the share price quite dramatically before and after payments are made. There are plenty of people who try to take advantage of these opportunities, and try to buy shares just before the payments are about to be made, and there are always people selling their shares straight after they have received a payment. Remember, the price of shares is only a reflection of what people are willing to buy them or sell them for. It is all about supply and demand. As a trader, If you receive a dividend payment from a company as a shareholder, it is an added bonus, but traders are generally only interested in making a capital gain. An investor, on the other hand, may not be too interested in making profits from buying and selling his shares, and is quite happy to receive regular dividend payments for many years. Thirdly: You can sell options over your shares and collect the premium. I'll talk a lot more in detail about this in later parts of this book, as this is one of my own preferred methods. And by far one of the safest ways I know of to actually buy shares as well, as part of the cost of share ownership is offset by the premium that I collect. Therefore owning the shares cost me less than having to pay for them in full on my own. Essentially as an owner of shares you can sell the right to someone else to buy these shares from you at a later date for a predetermined price (this is an option) and for this option you are paid a sum of money (a premium). Regardless whether or not they do buy the shares from you is not relevant as you still get to keep the premium - in fact, in most cases, you hope that they don't buy the shares from you - then you can sell more options to someone else! Some people liken this method to "renting out their shares". You can do it on a monthly basis, or once every 2-3 months. You already own the shares, selling options over them is likened to collecting rental income each month.
To many people, the share market is very confusing and difficult to understand. You may have seen movies or news channels which show stock market traders all standing around in a room, dressed in business suits and ties, all yelling out and shouting at each other. Other images include wealthy looking business men driving around in exotic sports cars talking on their mobile telephones to their brokers yelling out "sell … sell". This looks like absolute chaos; a place where there is no organization whatsoever. Today, most of the buying and selling is done via computers, and there is not as much yelling taking place. If you were to work alongside a trader now, the only noise you would hear would be the clacking of keyboards. When you wish to place an order (buy or sell), you simply contact your broker, either via telephone, or by placing your order via their web site. Here's how it works. Say you wish to purchase 1,000 XYZ shares @$10.00 ea. You contact your broker, who in turn places the order on his computer system. This order may then be matched by another broker who has a client who wishes to sell XYZ shares at $10.00 ea. Your broker then debits the money from your pre-nominated bank account and pays for the shares on your behalf. You are then sent a confirmation letting you know that the transaction has taken place and that you now own 1,000 XYZ shares. The appropriate paperwork is then forwarded on to you within a few days. The seller of the 1,000 XYZ shares is credited with the money of the sale into his account. He has now given up ownership of the shares and you now own them.
In order to profit from the share market, you must first understand the basics of how the market works; who the players are, and what their movements might be. The large investor Fund managers, corporations, and big private investors. These are the ones that I like to follow. These guys know what they are doing, and can change the market just through the sheer size of their transactions. The large investors are playing with millions of dollars of other people's investment and retirement money, which they cannot afford to lose; they generally tread carefully moving very large amounts of money from one spot to the next. It is often quite easy to spot these movements happening as large investors leave large footprints wherever they go. Following these footprints is often quite a safe way to make money and can be quite profitable if you get in at the right time. I'll talk about this a little later also. The stock market software trader With the aid of computer software programs and on-line Internet brokers web sites, we are able to track the stock market live as it happens. Many "day traders" use this information to monitor movements in the market as they happen, and act the moment that they do. Traders all around the world are sitting at their computer screens just waiting for opportunities to present themselves. The technical analyst These people generally track the market on a daily or weekly basis by hand, using large hand-drawn charts and graphs. Charts and graphs can be an essential tool for trading, but with today's technology, why would you even consider spending countless hours manually drawing charts by hand? The fundamentalist These people are generally the long-term investors rather than traders. They spend hours reading books, magazines, newsletters, company reports and prospectuses in the hope of finding potential investment opportunities. They are interested in the company's history, its net tangible assets, directors, dividends paid and any relevant information that they can dig up about the company, which may make it an attractive purchase. While this may on the surface seem like a safe way to play, it often isn't. A lot of the information that you read in the magazines and newsletters is so outdated by the time it reaches the newsstand, that whatever you were expecting to happen, may have already happened, and the news has already been acted upon. If you hear about a stock whose price is set to rise, chances are it has already happened, and people are now trying to get out and take some profit. With so many shares listed on the stock market, how can you possibly keep up with all of the information about all of the companies? You can't, and it is really a waste of time trying to. Often I trade shares in companies that I have never even heard of, have no idea who they are or what they do; and I do not even really care. All I know is that they are heading in the right direction (up), so I get in early and purchase some shares in the company. Once the shares start looking like coming down in price, I split. It is as simple as that. I never make the mistake of falling in love with my shares because they are supposedly a good company. If they are losing money, I look at the warning signs, and move on. I am not the captain; I abandon the sinking ship. There are just too many good opportunities to let pass by because I am trying to be loyal to the company. If I wanted to be loyal to a company, I would go and work for them. The uneducated investor / trader Most of us have been here some time or another, or certainly know someone who is. These ones listen to tips from friends at work or mates down at the pub. The advice is probably third hand already, coming from a friend of a friend, who knows nothing about trading, and have never owned a share in their life. The sad fact is that there are many people who listen to such advice who themselves have no idea about the market, and in turn, lose a lot of money as a result. This is a gambling mentality and should be kept to the racetracks and the casinos that best cater for this kind of adrenalin rush. If you want to trade purely for excitement or some kind of rush, you should seriously consider bungee jumping or skydiving. It will cost you a lot less money. Making Money in the Stock Market Click here to read about making money in the stock market |
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