It seems like an unspoken rule to buy stocks as an investor, but do you know how the profit comes about? Well, if you have this question or have just a surface-level understanding of how stocks work, then you are in the right place. It is only right to start by understanding what a stock is.
Let’s simplify what a stock is!
Stocks are units of shares in a publicly traded company that are listed on a stock exchange that makes up an important part of any investor’s portfolio. Companies issue stocks to raise funds for their firms and the buyers in return are given part claim on the company’s assets and earnings in proportion to how much they have invested. For instance, if you buy 500 out of the total 5000 shares of a firm, you own 10% of the company’s assets. When you buy stocks in a firm, you are given the right to vote in shareholder meetings, receive dividends when distributed and have a right to sell your shares. Statistics show that stocks have generated outstanding returns for decades and in many cases outperform other types of investments in the long-run.
Now, let’s get to the good part.
How You Make Money from Stocks.
1. Dividends — Get Paid for Holding Stocks
One of the most common ways to profit from stocks is dividends. When a company makes a profit, it may choose to distribute a portion of those earnings to shareholders. The board of directors decides how often dividends are paid — some companies pay quarterly, while others reinvest the profits to fuel business growth (which also benefits you in the long run).
Bonus Tip: Some companies offer dividend reinvestment plans (DRIPs), where instead of receiving cash payouts, your dividends are used to buy more shares — leveraging compound interest over time.
Additionally, some companies issue special dividends, which are one-time payouts to reward shareholders after an unexpected profit surge or a business unit sale.
2. Capital Gains — Buy Low, Sell High
Another way to profit from stocks is through capital appreciation. This happens when a stock’s price increases over time.
For example, let’s say you buy a company’s stock at ₦100 per share today. If the company performs well and its stock price rises to ₦150 per share within a year, that’s a 50% increase in value. If you sell, the ₦50 profit per share is called a capital gain.
The key to making consistent profits through capital appreciation is picking high-quality stocks with strong growth potential — and not just following market hype.
3. Short-Term Trading — Quick Profits, Higher Risk
For investors who love fast-paced action, short-term trading offers an opportunity to capitalize on market fluctuations within days or weeks. These traders analyze stock trends, price movements, and historical data to predict when a stock will rise or fall. However, this approach comes with higher risks — stock prices are influenced by market trends, economic news, and sometimes, just pure speculation. If you don’t have a well-thought-out strategy, short-term trading can be risky business.
🚨 Reality Check: While some traders make quick gains, others experience losses due to unpredictable market movements. If you’re considering this route, educate yourself, follow expert insights, and tread carefully.
Diversify with Mutual Funds & ETFs — Lower Risk, Steady Growth
If managing individual stocks feels overwhelming, you can still profit from the stock market through mutual funds or exchange-traded funds (ETFs).
Mutual Funds: These are actively managed by professional fund managers who invest in a diversified portfolio of stocks. You don’t have to pick stocks yourself — the experts do it for you.
ETFs: These are similar to mutual funds but are passively managed, tracking a market index rather than having a fund manager actively buy and sell stocks. ETFs typically have lower fees than mutual funds.
Both options allow you to spread risk across multiple stocks, making them a solid choice for investors who want long-term stability without actively managing their investments.
Key Takeaways — Smart Stock Investing Tips
- Think Long-Term: The stock market rewards patience. Hold quality stocks for the long haul and let them grow to their full potential. Remember that “Time in the market beats timing the market.”
- Reinvest Your Dividends: Take advantage of compounding returns by reinvesting your dividends whenever possible. The more shares you accumulate, the higher your potential gains.
- Do Your Research: Avoid investing in stocks based on hype. Always analyze financial statements, business models, and market trends before making investment decisions.
- Diversify Your Portfolio: Don’t put all your eggs in one basket. Spreading investments across different sectors reduces risk and increases stability.
