As we have talked about in the previous article, Fixed Deposits or Certificate of deposits or CDs are a way to generate an income cautiously but also without putting in much of an effort.
Another way of generating an income is through stocks. You buy shares of a company listed on the stock exchange and hope that the company does better in the future. Free cash flow is something investors look for before investing in a company. It is the extra revenue the company generates after taxes, debt payments and expenses. Or in other words a profitable company with a potential for growth.
But not all companies on the stock market stay profitable. As business environment changes, companies are faced with new challenges and those that are better positioned see a rise in their shares. Best example are the few tech companies like Amazon, Yahoo, Ebay that have fared well through many of the market sell-offs since the bursting dot-com bubble in the early 2000 s.
Like I’ve mentioned before, investments are made with the intention of returns. So, a stock is only considered an investment only when the company pays its shareholders dividends for the shares they own. Otherwise it is just speculative, often referred to as gambling where someone puts in their money with the hope that they can sell at a higher price sometime in the future. A struggling company can have you witness your hard earned money turn into vapor if you are not careful.
Make sure to do your research before making a decision. People like Warren Buffett are value investors meaning they look for the potential and growth in the company balance sheets before investing. They buy large shares and tend to hold on to those for the long run. Many investors are of the opinion that investing for the long term could generate you quiet a handsome return. Buffett also buys up entire companies in crucial sectors like energy, construction and transport which almost are guaranteed to generate good returns in the long run.
Stocks can be addicting and the speculation in the markets can take valuable time from other areas of your life. The money you invest is in confidence that the company executives will take decisions that are in the best interests of the company. Hope they do not have the same fate as Myspace, Nokia or Blackberry.
So, the question is, do you trust other people with your money? If you do, best to be vigilant about it.
This article is part of an on-going series on investing. Use category ‘Money’ to browse them all at once.
