When we think about investments, we usually imagine stockbrokers on the edge of their seats trying to make the big buck overnight. However, although there are plenty of cases that confirm these kinds of success stories, this kind of investment comes with a great risk for those involved.
You may have heard here or there how someone was fiddling with someone else’s money in the stock market. Well, this is something that isn’t mentioned a lot, but those who do get that big profit are usually very careful with their own money. It’s one thing having the money of a company in your hands and investing it in a risky stock trade, and something completely different if your own money is in the game.
Investing for income is not something that will get you rich very fast, rather it’s something that gives more security to those involved. Your investment is not short-term and you don’t have the possibility to “take the money and run” like in other riskier trades. But, what you can get is a steady income you can benefit from if you play your cards right.
Of course, this kind of investment doesn’t come cheap. If you, for example, buy a regular share at a low rate and want to sell it at a much higher rate, your initial strategy would be to buy as many shares as you can. If, for example, you buy 100 shares at a rate of $5 and sell them after 2 months for $10 a piece, you’ve made $500 in profit.
After that you have your initial $500 and the $500 you earned from the trade, but your shares are gone. You’re no longer a shareholder of the company that made you the profit. Of course, you may find another company to invest in, but there’s no guarantee that this new investment will yield any profit whatsoever. Sure, professionals who have long been in the market know how the market functions and are better equipped with knowledge and experience to predict how certain companies will behave in the future and whether or not it is safe to invest in them.
However, even the most experienced stockbrokers can’t predict certain factors that come into play when the stock market starts fluctuating. That’s why this kind of business is called risky. If you have disposable income you want to invest in a short-term deal, then this kind of trading may be ideal for you. On the other hand, if you’re looking for a more secure way to invest your money, you should be aware that those kinds of investments come at a heftier price and yield a lot less profit than the riskier type of investment.
These type of stocks, the ones that yield steady income from your investment, are called dividend stocks. They’re also one of the ways to create a steady and secure income over a longer period of time, in addition to options trading.
What’s the difference between regular stocks and dividend stocks?
In order for us to know the difference between these two types of stocks, we should first take a look at regular stocks and how they function. When a company goes public, it divides its ownership into so called shares or stocks (these two terms are often interchangeable, e.g stock of shares). Let’s say a company divides its ownership into 100,000 shares. If the company is worth $100,000 it means that one share is worth one dollar. If you buy 100 shares for 100 dollars, you own a certain percentage of the company, 0.001% in this example. Let’s say the company makes a profit by the end of the fiscal year, and now the shares are not worth $1 per share, but $10. You still own 0.001% of the company, but the company is now worth 1 million dollars. This means that by selling all of your 100 shares, you’ll get $1,000 but you only paid $100 in the beginning.
Dividend shares are completely different. In the same example, if you had dividend shares, you’d get paid a certain amount of the profit, your dividend, but keep your shares too. Let’s stick to the example above. The company who owns the shares made a profit of $900,000 in the last year. The board of the company decides that dividend shareholders will get 0.1% of the profits. Since you have 100 dividend shares, you’ll get 10% or in this case $90,000 at the end of the fiscal year.
Of course, these numbers are not usual and they’re here only for illustrating how dividend shares work. As you can see, dividend shares are much better than the riskier regular shares you can buy and sell, hoping to make a profit. The downside is, that there’s always the possibility that the board decides not to pay dividend in a certain year. However, becoming informed about a company’s policies on how frequently they pay this dividend is crucial before investing in dividend shares.
Another thing to look out for is the price you buy dividend shares at. Because of the profitability and security, dividend shares of big companies are very rare and usually in the possession of the major shareholders, while dividend shares of smaller companies are easier to come by, but cannot promise the dividend profit the big companies can.
Even if you get your hands on an option to buy dividend shares, be ready to say goodbye to a lot of money for them. As we said before, these types of shares are very limited because of the security they can grant to your investment. However, because of this, they’re also very pricey in comparison.
All in all, investing is a balancing act. If you’re looking for a quick buck and have the necessary knowledge about the market, then you should consider trading with regular shares and stocks. However, if you’re looking to invest for long-term income, be ready for a slow-burning process of profiting that will cost you a bit more in the beginning.