Playing the stock market is an art form. Similar to a Casino, it can be considered gambling, but this kind of gambling is closely watched by State & Government while Casino’s are closely watched by, you guessed it, the Casino…and they report to the State & Government.
So in the simplest form, playing the stock market goes like this:
- Buy stock at a low price
- Sell when the price goes up
Lets explore these points a bit deeper shall we.
Buy stock at a low price:
Lets say you have $100. You see a stock that costs $1 per share. You can buy 100 shares (There may be additional fee’s for the trade / commission).
OK, you have 100 shares and your down $100. What do you do next?
Sell When The Price Goes Up:
Lets say the price of that stock goes up and is now $10 per share. Now you can initiate another trade to sell your 100 shares at $10 each. Now, you no longer own the shares but you now have $1,000 in your pocket ($10 x 100 shares).
Sounds simple huh? Enjoy your quick moment. I’ll wait…Now let me go ahead and help you come back down from cloud 9 to cloud 4.
The Dirty 5 Letter Word – Taxes:
Whenever you make money, the IRS is standing right by your side waiting for their cut. Well how much is their cut? Depends how long you owned the stock. Depending on how long you held onto the stock determines how much tax you will be paying when you file your taxes. There are only 2 tax categories, lets see the difference:
- You held the stock for 365 days or less: 40% Tax
- You held the stock for 366 or more: 15% Tax
Seems like there is an incentive there to make you hold onto the stock for a year or more. There are other factors on why to hold onto a stock for a year or more than just taxes but depending on the stock, the juice may not be worth the squeeze. Many factors come into play that may seem intimidating but once you get comfortable with the terminology and the process, you can make better decisions.
Dividends:
Some stock will pay out a dividend either quarterly or annually. You remember the word dividend from playing monopoly. You got that card and you received money. But how does it actually work?
If the stock is doing well, lets say that it will give you $0.50 per share every quarter (4 qtr’s in a year). So if you own 1 share, every quarter you get $0.50 so in a year you made $2 ($0.50 x 4). Lets say you own those 100 shares from earlier that we spoke about, each share would make $2 which would give you $200 for that year ($2 per share annually x 100 shares you own).
So yes, if your buying stock and thinking to hold onto it for a long time, look to buy stocks that pay dividends. If the stock does not pay dividends, then your just holding onto stock and hoping to cash out when it goes up. That’s not bad but if you get stocks that pay dividends, your extending the return on the investment your making.
I’m not saying it’s good or bad, it’s a personal preference. There is no right or wrong way to do this.
Again, this is a quick and dirty explanation of the basic’s as I have come to experience and learn about the “art form”. Do you own research and make sure you make informed decisions. My intention here is to lessen any intimidation you may have around stocks by explaining the bare basics. Hopefully this helps to understand the process a bit better or at least make you a bit more comfortable.