How Do I Make Money From Stock Investing?


Dear SmallIvy,SmallIvy_1x1

Thank you for your website! I’m new to the stock market in investing in different companies. Today I see over a three-week period that I’ve made a total of $8000 on about seven different stocks. Or I should say I’m up $8k What I don’t know is should I take the money I’ve made and just leave the principal? I’m confused on how you ever get to use any of the profits. Do you have to sell the entire shares in the one particular stock to get the gain  that you made? And if you do so would it be worth it to let’s say sell each stock to get  the $1500 and then turn around and reinvest the principal again?   It only cost me nine dollars to buy or sell, so I’m wondering why I wouldn’t take the profit why it’s up? I’m grateful if you can answer these general questions for me.

Thank you, Kathy

Dear Kathy,
Thank you for visiting the blog – I hope you return many times in the future. 

The way you make money from buying individual stocks, beyond any dividends they may pay, is by selling the shares for a price greater than what you paid.  You can also sell however many shares you wish, but obviously the percentage you’re paying in fees increases if you sell fewer shares.  For example, if you sold one share at $50 with the $9 commission you’re paying, you would be paying 18% commission, where if you sold 100 shares you’d only be paying 0.18%.  Note you’ll also need to pay taxes when you sell at a profit, and taxes are higher (usually) if you hold for a short period of time, so that’s something else to consider.

Now whether you should sell is a harder question because it really depends on your circumstances.  If you took money you need for rent next month or even for retirement in five years and invested it in individual stocks, certainly you should sell (and you should not have invested it in the first place) because you can’t afford the risk of loss if you really need the money soon.  If you won’t need the money for many years, or it really won’t affect your life if you suffered a loss because it is just extra money you can use to try to generate additional income, then investing makes sense.

As far as how much to sell goes, it sounds like you’re setting yourself up for what is called “churning,” which may be good for ice cream but is not good for investing.  Churning is when you frequently buy and sell shares, moving the money in your account around just like an ice cream churn would constantly mix the cream and froth it to add air.  Churning you account makes you pay a lot in brokerage fees, even if it is only a little per trade, increases the complexity and possibly the amount of your taxes, and – most significantly – increases the chances that you’ll be out of the market when a stock makes a really significant gain.  With investing in stocks, forget about what’s principle and what’s gains.  Instead you should be concentrating in building up your portfolio by constantly adding to it and investing in companies that can take your money and use it to build great enterprises that generate much larger revenues than they can today.

When I invest, I do what I call “serious investing.”  If you search through some of the posts on my blog, you can find several posts that I’ve done on this subject, and most of the SmallIvy Book of Investing, Book 1 is on this wealth management and growth strategy.  I invest intending to stay invested for many years.  I want to buy a company and then let it grow and grow.  I want to invest maybe $25,000 and have it grow into a quarter million or more over a period of ten to fifteen years. 

With that mindset, I don’t worry about how much money I’ve made on a stock.  It has nothing to do with whether I sell or continue to hold.  I might sell a few shares if I need the money for something, or I might sell a few shares if the position gets huge and I’m worried about losing a lot of it if the company has a scandal or something, but I don’t sell just because I’ve made of lost some fixed amount of money.  As long as a company is still doing what I want it to do – growing and making more money each year – I’ll tend to hold on.  I look at the company’s prospects compared to other companies into which I could invest. 

Hope this is helpful,
SI

 

 

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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