Let’s be real, this is what investing is all about. And the Holy Grail of investing is making money consistently, with as little down side as possible. After all, the greatest investor of all time – Warren Buffett – likes to say that the first rule of investing is ‘don’t lose money’ (the second rule is don’t forget the first rule). It all sounds so simple, but let’s have a look at how exactly making money from shares works.
When it comes down to it, you make money from shares in one of two ways.
Firstly, you buy stock for (hopefully) a low price and sell it for a higher price down the road – in other words, buy low, sell high. Again, this sounds simple, but working out what price to buy is the hard part.
A value investor will tell you that you should wait until the price is below what the shares are worth before buying.
A growth investor might tell you it doesn’t really matter, as long as the company is growing at breakneck speed.
The best way to do this is to pick a strategy, do some (preferably a lot of) research and give it a go yourself.
The second way is through dividends. Dividends are regular cash payments made by public companies to their shareholders, usually expressed as a yield percentage of the stock price. It’s important to note that some companies pay out a 6% yield, others a 2% and some do not pay dividends at all.
Many investors invest purely for dividends and cash flow, viewing them in the same way as rent from an investment property. Other investors are happy to accept them, but they aren’t the primary objective.
Most dividend investors (depending on their risk profile) aim to have a mix of big yielding shares, like National Australia Bank Ltd (ASX: NAB) or Telstra Corporation Ltd (ASX: TLS) and dividend-growth stocks like Appen Ltd (ASX: APX). Dividend-growth stocks are companies that are growing and concurrently paying out a growing dividend.
Of course, it’s easier to talk about how to make money with shares than actually doing it. Most investors (including this writer) make many mistakes before getting across the required skills and understanding to start making money with ASX shares. But it’s a pursuit that can (of course) be very lucrative for those who do.
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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Appen Ltd and National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.