Easy Stock Market Money

For most people trying to make money with the stock market "buy low, sell high" is the mantra repeated but rarely followed. Is it the only way to make money investing in the stock market? No. This article covers the very beginner ways to make money from the stock market. No complicated derivatives or scalping techniques, just an explanation of the basics.

Buy low, sell high.  This saying is the most simple explanation of the term capital appreciation and is generally the most common way that people make easy money in the stock market.  Over time the market has shown that most stocks will increase in value, although not all do. So the challenge comes in finding the right ones.  There are many resources out there including www.canadianpennystocks.ca that give ideas on which companies might be set for a price increase.

There are two main factors that cause a stock's value to increase; earnings and growth. Retained earnings are whatever profits are left over in the company's bank account after shareholders have been paid.  These retained earnings are spread out amongst the shares in the company and increases the value of each individual share.

The other main factor that causes a company's stock to increase is growth.  If the company is new and opening up new international offices and expanding domestic operations, chances are they are growing and are anticipating further growth.  Because of the strong anticipation of growth the stock will trade at a higher multiple (P/E) than a similar company that is not growing.

Although buying low and selling high is the most common way to make easy stock market money, the easiest way to make stock market money is with dividends distributions.  There is no free ride on the stock market but this is the closest thing to it.  In the simplest of terms companies pay you, the shareholder, the profits from their operations just for owning the stock.

Not all companies pay dividends and the size of the dividend can vary greatly between industries and individual companies.  Most small cap companies that are focused on growth and research keep most of their profits to further grow the company and rarely pay dividends.  Meanwhile large companies with little growth will be more apt to pay out a percentage of profits to shareholders (think banks, insurance companies, etc.)

Getting Detailed With The Dividends

There are two different types dividends; regular and extra.  The regular dividends are set out by the Board of Directors to be distributed to the shareholders on a prescribed date at a specified price. An extra dividend is declared when a company is outperforming their expectations and has decided to pass on the extra profits to its shareholders.  This is a great bonus to the investor.

This dividend stuff sounds pretty good but keep in mind that unlike interest on debt, there is no obligation for companies to pay dividends even though it said it was planning to.  If a company is experiencing trouble they could slash or completely eliminate the dividend payment altogether.  When this happens, expect the share price to drop as dividend investors sell out of their position.

Get In While the Getting Is Good

When a company declares that they will be honouring their dividend payment to shareholders there are two dates to keep in mind, the ex-dividend and the dividend record date.  The dividend record date is the date used on which all shareholders of record will be entitled to the dividend payment.  The ex-dividend date is 2 days before this and is the first day of trading without a dividend.  The reason for the ex-dividend date is that it takes 3 days for a stock trade to "settle" so trades made 2 days before the record date won't appear on the shareholders list and therefore will not get paid a dividend.

The Compounding Of Easiness

The easy money just keeps getting easier if dividend reinvestment plans (often called DRIPs).  In these types of scenarios the dividend payout you receive from the company gets diverted back into buying more stock in that company instead of paying you the cash directly.   This is a great strategy to grow your investment without having to add any more of your own money.

The two great advantages to DRIPs are the compounding effect of money and dollar cost averaging.  Without going in to too much detail about compounding, let's just say that it is an explosive way to grow money.  To get technical, it's exponential growth, and one of the reasons the rich get richer (also one of the ways you can be like them).  

Dollar cost averaging is another great win-win situation where you're buying into the company over time and winning whether the price is up or down.  If the price is up you're winning with all your money invested since the stock you own is going up.  Lucky you!   If the stock price fell, then the amount of money you received from your dividend payment is able to buy more shares than it would have at a higher price so you now own a larger piece of the company.  When the price recovers you own more of the company and are profiting even more.  Lucky you again!

Easy Come Easy Go (for Canadians)

This section deals with the basic Tax treatment of stocks in Canada and is not meant as advice and not necessarily completely accurate.  Consult a tax professional before completing your tax information regarding your investments.

Yes the government wants their money on the easy money you've made but there is good news.  The Canadian tax system has some advantages to those people investing in the stock market!  Capital gains exemption, dividend tax credit and sheltered programs like RRSP and TFSA.  There could be an entire books written on each one of these topics but each one will only be briefly covered here.

So you've just bought low and sold high.  Congrats on your capital appreciation.  The Canadian government calls this a capital gain (ie: income) and wants to tax you on it.  The good news is that only 50% of the capital gain must be included as income. Although it would be nice to only have capital gains, we will have capital losses as well, but there's more good news in that we can use these losses to offset our gains, and therefore pay even less income tax on those big gains we had.

Have you taken advantage of the near free ride of dividends?  It's great if you did and now you've got to pay tax on it.  Fortunately there is a dividend tax credit for any dividends you receive from Canadian companies. Before calculating the tax credit there is a "grossing up" process where you add 45% to the total dividend income received over the tax year giving you the taxable amount of dividend.  From this number you can claim a 19% credit from the total which could create big savings in your tax bill over interest income.

This is a very quick overview of some tax efficiencies in the Canadian stock market and have more specific guidelines than what is described here.  Again, consult a professional when dealing with your personal financial situation.

So there you have it.  The easy money from the stock market.  From basic capital appreciation to dividends and the tax treatments of both, it couldn't be simpler.  Before taking any one of the approaches to making easy money consider your personal risk tolerance and financial goals.  When you know yourself you will be prepare to continue your financial education and keep the easy money coming.