How to Make Money from Stock Market
The stock market can be a great way to make money. There are so many people who become billionaires from stocks. Late Rakesh Jhunjhunwala, R K Damani, and Warren Buffett are classic examples. Late Rakesh Jhunjhunwala has $5.8 Billion net worth. Warren Buffett is called the all-time greatest investor who made billions from the stock market. Let’s talk about some of the options you can make money from stock market.
5 Options to Make Money from Stock Market
- Dividend
- Bonus
- Buy & Hold
- Interest
- Trading
Dividend
You can make money from stock market through dividends. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings). The current year profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital.
Distribution to shareholders may be in cash (usually by bank transfer) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.
The dividend received by a shareholder is income of the shareholder and may be subject to income tax. A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding. Dividends can provide at least temporarily stable income and raise morale among shareholders, but are not guaranteed to continue.
Retained earnings (profits that have not been distributed as dividends) are shown in the shareholders’ equity section on the company’s balance sheet – the same as its issued share capital. Public companies usually pay dividends on a fixed schedule but may cancel a scheduled dividend, or declare an unscheduled dividend at any time.
There are 4 types of dividend income in the Share Market.
- Interim Dividend
- Final Dividend
- Special Dividend
- Preferred Dividend
Interim Dividend – An interim dividend is a dividend payment that is made before the annual general meeting (AGM) and the publishing of complete financial results by a firm. This declared dividend is typically announced alongside the company’s interim financial reporting. Typically, it is the smaller of the two payments issued to shareholders.
Final Dividend – The final Dividend is generally more significant than the interim dividend. It is because the Company tends to be a little conservative during the financial year until it gets the annual accounts, i.e., revenues and expenditures for the year. After the Company knows its profits for the financial year, it chooses to retain some portion for future business needs. At the same time, the remaining is distributed amongst the shareholders as the final dividend.
Special Dividend – A special dividend, also referred to as an extra dividend, is a non-recurring, “one-time” dividend distributed by a company to its shareholders. It is separate from the regular cycle of dividends and is usually abnormally larger than a company’s typical dividend payment. Special dividends are typically declared after exceptionally strong company earnings, the sale of a subsidiary or business unit, a business spin-off, or after achieving a company milestone.
Preferred Dividend – The boards of directors of public companies determine whether to pay a dividend to holders of its common stock and how much to payout. Preferred dividends are issued based on the par value and dividend rate of the preferred stock. While preferred dividends are issued at a fixed rate based on their par value, this may be unfavorable in high inflation periods.
This is because the fixed payment is based on a real rate of interest and is typically unadjusted for inflation. The dividends for preferred stocks are by definition determined in advance and paid out before any dividend for the company’s common stock is determined. The dividend may be a set percentage or may be tied to a particular benchmark interest rate. The dividend is generally paid on a quarterly or annual basis.
Bonus
You can make money from stock market through Bonus issue. A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to existing shareholders. For example, a company may give one bonus share for every five shares held. Companies issue bonus shares to attract further investment and reward shareholders.
Bonus issues increase a company’s outstanding shares but not its market capitalization. Companies usually fund a bonus issue through profits or existing share reserves. The issuance of bonus shares is not taxable; however, shareholders must still pay capital gains tax if they sell them for a net gain.
Bonus shares are issued in a particular ratio (eg 1:1, 1:2 etc). This means that the company will issue one bonus share for every one share held by the existing shareholders and one bonus share for every two shares held by the existing shareholders, respectively.
Buy & Hold
You can make money from stock market by holding the stocks. The key to making money in stocks is remaining in the stock market. Your length of time in the market is the best predictor of your total performance. The buy and hold strategy is exactly what it sounds like — you buy stocks that you believe will perform well over the long-term, then hold onto them for years to come.
The stock market’s average return is about 10% annually — better than you can find in a bank account or bonds. But many investors fail to earn that 10% simply because they don’t stay invested long enough. They often move in and out of the stock market at the worst possible times, missing out on annual returns. You should invest only money that you won’t need for at least five years. That way, you have time to ride out market ups and downs and still make money.
Interest
You can earn Interest rates and make money from stock market through Bonds. These bonds can be govt. bonds or private bonds, they provide the interest rates for investors.
A bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. The company pays the interest at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.
Unlike stocks, bonds can vary significantly based on the terms of their indenture, a legal document outlining the characteristics of the bond. Because each bond issue is different, it is important to understand the precise terms before investing. In particular, there are six important features to look for when considering a bond.
To make money from stock market through bonds you need to understand the types of bonds available in market. You can track live bonds market from here. Let’s understand how many types of bonds are available:
Types of Bonds
Corporate Bonds
Corporate bonds refer to the debt securities that companies issue to pay their expenses and raise capital. The yield of these bonds depends on the creditworthiness of the company that issues them. The riskiest bonds are known as “junk bonds,” but they also offer the highest returns, so you can make money from stock market using junk bonds as well. Interest from corporate bonds is subject to both federal and local income taxes.
Sovereign Bonds
Sovereign bonds, or sovereign debt, are debt securities issued by national governments to defray their expenses. Because the issuing governments are very unlikely to default, these bonds typically have a very high credit rating and a relatively low yield.
Municipal Bonds
Municipal bonds, or munis, are bonds issued by local governments. Contrary to what the name suggests, this can refer to state and county debt, not just municipal debt. Municipal bond income is not subject to most taxes, making them an attractive investment for investors in higher tax brackets.
Trading
You can make money from stock market through Trading option. Trading is essentially the exchange of goods and services between two entities. In this context, the entities are investors/traders who are exchanging stocks of different companies. Stock trading takes place in the stock market. With online trading and investing, stock markets have become accessible to a larger section of people.
Types of Trading in Stock Market
Day Trading
This form of trade involves purchasing and selling stocks in a single day. A single day in stock market terms means 9:15 am to 3:30 pm on a weekday (barring market holidays). In the case of day trading, individuals hold stocks for a few minutes or hours.
Scalping
It is also known as micro-trading. Scalping and day-trading are both subsets of intraday trading. Scalping involves reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day.
However, every transaction does not yield profits, and in some cases a trader’s gross losses might exceed the gains. The holding period of securities, in this case, is shorter compared to day-trading, i.e. individuals hold stocks spanning a maximum of a few minutes.
Swing Trading
This style of stock market trading is used to capitalise on the short-term stock trends and patterns. Swing trading is used to earn gains from stock within a few days of purchasing it; ideally one to seven days. Traders technically analyse the stocks to gauge the movement patterns they are following for proper execution of their investment objectives.
Momentum Trading
In case of momentum trading, a trader exploits a stock’s momentum, i.e. a substantial value movement of stock, either upwards or downwards. A trader tries to capitalise on such momentum by identifying the stocks that are either breaking out or will break out.
In case of upward momentum, the trader sells the stocks he/she is holding, thus yielding higher than average returns. In case of downward movement, the trader purchases a considerable volume of stocks to sell when its price increases.
Example:
Mr A holds 7000 shares of S Private Limited at Rs. 50 per share. On 1st April 2019, he sees the NAV of such shares showing upward momentum. He decides to sell 3000 shares at Rs. 60 on the first day. After that, He sells the remaining shares at a uniform rate of Rs. 65.
Therefore, his overall profit from the transactions is –
Rs. {(3000 * 60) + (4000 * 65)} – (7000 * 50) or, Rs. 90,000
Position Trading
Position traders hold securities for months aiming to capitalise on the long-term potential of stocks rather than short-term price movements. This style of trade is ideal for individuals who are not market professionals or regular participants of the market.
Conclusion
You can make money from stock market through various ways. Remember before investing in the stock market do you own research or consult the financial advisor. Many people have become billionaires through stock market but they learned it before investing so you should also learn before make money from stock market.