The stock market exists to assist entrepreneurs in raising capital to build their businesses.

 

It also allows ordinary people to share in the wealth created by these entrepreneurs by partnering with them through the purchase of shares in their businesses.

 

In this article, you will learn five ways you can profit from shares investing.

 

Also read, 13 Ways to Get Started in Equity Investment For Beginners

 

1. Capital Appreciation 💰

 

What is Capital Appreciation? 

 

Capital appreciation or growth is the increase in the market price of your shares over time—the growth of your initial capital invested in the market.

What is Capital Gain? 

 

Capital gain is the difference between the current market price or value of your investment and the initial capital you invested. 

 

How to Calculate Capital Appreciation or Gain

 

Capital Gain = Current Market Price – Initial or Total Invested Capital

 

For example, if you buy a stock for $7 per share and it rises to $10 per share, that means you have made a capital gain of $3. 

 

What Factors Cause Capital Appreciation?

 

📌 Supply and Demand

The forces of demand and supply influence asset prices. When a large number of people buy a stock, the price is bound to rise.

 

If many people sell a stock, the price will fall. The higher the demand, the higher the price.

 

📌📌 Asset Value

The actual (intrinsic) or perceived value of an asset is what drives demand for it or causes investors to sell it.

 

For example, if a company is doing well in its business and consistently growing its revenue, with a healthy balance sheet, all else being equal, its stock price will rise due to high demand from investors.

 

The clause “all else being equal” means that the market price of an asset is determined by the interaction of investors and market forces on the operating asset.

 

In the short term, the market can undervalue or overvalue a stock.

 

 

Read also, 11 Mistakes Beginning Investors Make and How to Avoid Them

 

2. Dividends 💵

 

Investing in the stock market isn’t just about expecting share prices to rise. Another advantage is the payment of dividends by corporations.

 

Dividends are payments made directly to shareholders from a company’s profits.

 

If a company wants to pay dividends, it may do so at the end of the financial year or on a quarterly or bi-annual basis.

 

The profit-after-tax (PAT) of the accounting period is distributed to shareholders in proportion to the number of shares owned.

 

However, not all businesses pay dividends.

 

Nonetheless, even if you do not receive dividends (cash or bonus shares), you can profit from your shares through price appreciation in the open market as well as three other methods listed below.

 

3. Bonus Shares

 

Bonus shares are dividends in the form of additional free shares distributed to shareholders in proportion to their holdings.

 

In this case, rather than being paid in cash, the PAT is converted into shares. That is why bonus issues are also referred to as capitalization issues.

 

It could be in the ratio of 1:1 (one for one), 1:3, or 1:7, depending on the company’s decision.

 

This increases the total number of shares you own in the company as well as the company’s total number of shares outstanding (shares held by shareholders).

 

This means that for every single share held, you get one free; one free for every three existing shares; or one free for every seven existing units of shares, as the case may be.

 

Bonus issues are also referred to as scrip issues. This is not to be confused with scrip dividends.

 

What Is the Difference Between Scrip Issues and Scrip Dividends?

 

When a company pays a scrip dividend, it gives its shareholders the option of receiving their dividends in the form of company shares or cash.

 

A scrip issue, on the other hand, has no such option. Only the company’s shares are paid out.

Read also, Advantages of Investing in Shares of Companies

 

4. Stock Split

 

What is Stock Split?

 

A stock split essentially means that the price of the stock will decrease while the number of shares you currently own will multiply based on the split ratio.

 

How does a stock split benefit you as an investor?

Let’s examine a real stock split example:  

 

Amazon’s ($AMZN) 20-for-1 Stock Split Case Study

On March 9, 2022, Amazon announced a stock split of 20:1 (twenty-to-one).

 

Let’s say you owned one share of $AMZN, and the market price was $2,000 before the split on June 3, 2022.

 

Following the split, you would have 20 units of $AMZN rather than 1 unit before the split.

That means that investors who owned one Amazon share received 19 more shares.

 

Also, after the split, $AMZN’s market price would have been reconstructed to about $124.

 

In other words, at $124 per share, $AMZN would be more appealing (affordable) to retail investors than at $2,000 per share previously.

 

How Does a Stock Split Benefit Investors?

 

👌 A stock split potentially makes the shares more accessible to a larger number of investors due to the lower price.

 

👌 As the stock becomes cheaper, new investors can (and will) jump in to buy the stock.

 

👌 Existing shareholders will accumulate the stock at the new lower price.

 

👌 This new surge in demand will push the price up over time.

 

Therefore, the advantages a stock split provides you as an investor are:

 

✅ Increase in the units of the stock in your portfolio.

 

✅ When the price rises again (due to increased demand from old and new investors due to the current lower price), you will profit more.

 

 

5. Premium on Stock Options

 

You can sell stock put options in order to obtain stocks for free and earn monthly income regardless of market conditions.

 

What is a Put Option in Stocks Trading?

 

A put option is a contract that grants the buyer of your option the right to sell the shares at a predetermined fixed price (strike price) on or before an expiration date.

 

To exercise this right, the buyer must pay a premium to you, the seller.

 

If the option expires worthless (that is, the stock not yielding to the buyer’s prediction), you keep the premium as well as your stocks.

 

There you have it, the five fruits of investing in stocks and shares.