2 Ways You Can Make Money as a Shareholder
You should be fully informed about what a shareholder is after yesterday’s 101.
I hope you’re feeling more confident!
It’s great to know and understand what a shareholder is, but how does knowing all of that actually put cash in your pocket?
Well, today I’ll tell you how…
How Do You Make Money as a Shareholder?
There are two basic ways to make money as a shareholder.
One involves a long-term approach (dividends) and the other can involve both long- and short-term strategies (capital appreciation).
Before I go on, I want to make clear that you don’t always make money as a shareholder. You can lose your entire investment and, depending on the type of position, even lose money.
Just a few days ago, for instance, I bought several shares of stock at a decent price. I saw the bounce coming, and I intended to wait it out.
The stock price dipped, and I had a choice to make. I could sell at a loss or wait and see if it would bounce back up.
Based on my experience and my forecast, I decided to take Door Number Three instead. I bought more of the stock because I believed it would pay off. And it did. I would up making more money than I intended in the first place.
But that doesn’t always happen. An investment isn’t a loan, so you’re not guaranteed repayment — and certainly not with interest.
Can you make money? Absolutely. I’m living proof. But you need a strategy.
Dividends are monies paid to shareholders based on a company’s earnings. Dividends can arrive monthly, quarterly, or annually, and usually come in the form of cash.
When you get dividends in the form of additional stock, they’re called stock splits. Cash dividends, however, are far more common.
The general idea is that a company divides its earnings equally among its shareholders based on how many shares each individual or entity owns. For the sake of a simplistic example, if you owned 20 percent of a company’s shares, you’d receive 20 percent of its dividends.
Major stock exchanges often get a large portion of their returns from dividends. Although capital appreciation still wins the lion’s share, it’s not a good idea to discount dividends as a potential profit source.
A company pays dividends to attract more investors. If you knew that you could profit at regular intervals just for owning shares in a company, you’d find that investment more attractive than if you were just banking on stock price appreciation upon selling your shares.
This is the bread and butter of the stock market. It can happen in a very short time frame — down to the seconds — or it can take place over a long period of time.
Capital appreciation refers to the increase of a stock’s price. Conversely, capital depreciation describes a dipping stock price.
As an investor and shareholder, you want to earn money on your investment. As shares become more expensive, you stand to earn more money, and you can divide your investment capital over as many stocks as you wish.
How to Be a Shareholder
If you want to become a shareholder in a particular company, you’ll need a broker account and an initial capital investment. The amount of “starter” money you need depends entirely on the types of stocks you wish to buy.
For instance, I got my start in penny stocks with just over $12,000 — money saved from my childhood. Others have gotten started with as little as $500.
If you want to trade blue chip stocks, you’ll need far more money. Many brokers won’t approve your application unless you have at least $20,000 or $30,000 to put into your account.
Brokers can have other requirements, too.
For instance, many won’t approve applications unless the applicant has a minimum net worth or annual salary. This is to maintain the integrity of the brokerage account.
Brokers might ask you what your trading goals are and what type of trading strategies you intend to use. They use your answers to decide whether or not you’re a good fit for their firm.
You must then place a buy order through your broker. For example, you might want to buy 100 shares of ABC stock at $10 per share. That will cost you $1,000. Your broker will also charge a commission, which you must add to the total amount of money you’ll set aside in your brokerage account.
You can decide whether to buy the shares at market price or to place a limit order, which means that you only want to buy shares of that stock if the price hits a certain point.
Role of Shareholders in a Company
The roles of shareholders depend on the type of shareholder in question.
If you’re simply trading stocks on the stock market, you don’t have a role beyond buying and selling. That’s the easiest — and, in my opinion, most profitable — way to get started with investing.
Shareholders can also be owners, founders, or employees at a company. In this case, they have far greater roles because they’re involved with the business’s operations.
Even vendors can be shareholders. A company might enter into a barter-type agreement in which the vendor supplies his or her products or services for a specific time in exchange for X shares in the company.
A shareholder agreement creates a contract between the people who own shares in a particular stock and the company behind the stock. It addresses issues like the rights and obligations of both parties.
Standard shareholder agreements also contain information about how a company should be run, such as the process for electing the board of directors and determining salaries for directors.
If you’re investing in the stock market, you don’t need to worry about any of these details.
But you should still know about the types of shareholders that are out there.
I’ll cover these in our next issue and throw in some examples of the kinds of shareholders you can encounter (or become!)
That will then conclude our discussion of shareholders.
— Tim Sykes
Editor, Penny Stock Millionaires