The media would hype stories of someone who bought a stock at 10, sold at 100 and went on to buy an island. But that is not all that happens. In fact there are many instances, where that does not actually happen or it doesn’t happen to the magnitude that was anticipated.
Obviously, everyone wants to buy a stock at a low price and watch the price climb, but even if that doesn’t happen you can still make money from investing in stocks.
Here are some ways to make money from stocks when prices aren’t climbing higher:
Cash Dividend – This is the share of a companies profit that is paid out to shareholders. It is usually discretionary I.e. management may opt not to pay a dividend. When they are paid you receive an alert in your bank account of the dividend amount less taxes. Most companies do not like to reduce their dividend, they try to keep it growing and constant at worst.
Scrip Dividend (Bonus Shares) – This is quite similar to a cash dividend, given it is also discretionary and based on the performance of the company. Instead of paying out cash to shareholders, the company might opt to issue additional shares to share holders.
Short Selling – It is possible to make money from stocks when prices are going down. So if a stock is at 100 and you think it will be 10 tomorrow, you can go borrow the stock, sell at 100, wait some time and buy it back at 10, that leave you with a spread of 90. A lot of institutional investors make money from doing this in developed markets. It is currently not allowed in Nigeria.
Securities Lending – If you have a large portfolio of stocks, instead of just leaving them idle until the day you want to sell, you can lend the stock to a short seller who would pays a fee for ‘renting’ the stocks.
In Nigeria, the last 2 are predominantly available to institutional and qualified investors. So the focus for the individual investor should be on the stock of companies that consistently pay good dividend.