Investing in the Stock Market

Stocks allow you to take an ownership interest in a company and as Jason Kelly in his book “The Neatest Little Guide to Stock Market Investing” (I’ll refer to it as The Neatest Little Guide) says, stocks have been the best investments over time.

I don’t know Jason but I really like this book!  It was easy to read and follow and I would definitely recommend it.  Jason says that the stock market has returned around 10.5% a year for the past 75 years or so and that anyone who intends to be around longer than ten years needs to invest in stocks as that is where the money is.  That sounds promising to me.

He uses the example of investing in McDonalds.  It became a public company in 1965 at $22.50 per share.  Forty-seven years and many stock splits later, 100 shares of McDonalds would have become worth $7.4 million.  Wouldn't it be great to find the next McDonalds?!

You make money from the stock market through:

·      capital appreciation: Capital appreciation is the profit you keep after buying a stock and then selling it a higher price.  If you sell a stock for more than you paid for it, that is a capital gain.  If you sell a stock for less than you paid for it, that is a capital loss.

·      dividends:  Dividends are a share of the company profit in a different way.  As an owner in the company through stocks, you may get a stock dividend which is a share of profit the company is doling out on a regular basis while you are still owner.  You may be able to have your dividend reinvested in the stock through a dividend reinvestment plan (DRIP).  This means instead of taking the dividend out, it is reinvested in the company.  Dividends are discretionary.

These two items combine for your total return which is usually expressed as a percentage.  So when people talk about their “return on investment” you now know what they mean!

Full book cite-- Kelly, Jason. The Neatest Little Guide to Stock Market Investing. New York: Penguin Group, 2012. Print