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Make Money From The Stock Market For Early Retirement
Won't it be great to be able to make money from the stock market so that you can retire early? You can spend more time with your grand kids, or cruise round the world, or do all those things that you said you would do.....someday.
But you also know that investing in the stock market is not for the faint of heart. While there is money to be made, you have neither the knowledge, skills nor the fortitude to take the ups and downs of the market. Furthermore, you know that it is risky and you have no intention of gambling your money away.
But what if I were to tell you that there is a way to make good money on the stock market with relatively low risk? You will need to learn a little bit about the market, but only the very basics. The disadvantage of this technique is that you need to have a longer term time horizon, at least 5 to 10 years.
This technique is actually no big secret but is often overlooked in favor of other riskier techniques that can earn more money, and generate more broker commissions. Very simply, this technique involves buying shares of companies that pays high dividends. That's it.
However, as you may guess, just buying the shares is not without its risks or everybody will be doing it. But, if you apply a few simple rules, this investment technique can give you pretty good money with relatively low risk.
- Set aside a small amount each month for buying shares. It is okay if you can't do it every month but make sure you spread out your buying and not do it all at one go.
- Obtain a listing of the shares traded on your local stock exchange along with their relevant data. Make sure the PE ratio and dividend yield is included in the data.
- From the listing, shortlist the shares with a high dividend yield. I would normally only be interested in shares with a dividend yield of 5% and above.
- From your list, remove the shares that does not have a PE ratio listed, that is, they are losing money. From the remaining list, also remove the shares with a high PE ratio. For me, a PE ratio of higher than 20 is too high. I usually go for shares with a PE ratio of 10 or below.
- At this point, aim to have 5 to 20 shares left in your list. You now need to check the individual companies for their history of dividend payments. Make sure they have a consistent history of dividend payments going back at least 3 to 5 years. If you like, you can even read their annual report to see if there is any mention of the company's dividend payment policy.
- Additional factors that you want to consider in your selection of shares are the liquidity of the shares and the market sector the company is involved in.
- You now have a list of shares you want to invest in. Buy one company's shares every month, and make sure it is a different company each time.
- It is recommended that you redo steps 2 - 6 at least once every 6 months although once a month would be ideal.
- Once a year, look through your records for shares that have stopped giving out dividends. Also look out for shares whose dividend yield has gotten too low, or whose PE ratio has risen too high. My advice would be to sell off those shares.
Risks And Rewards
There is no such thing as a risk free investment, whether in the stock market or elsewhere. In fact, even putting your money in the bank has risks, as the financial crisis that started in 2008 has shown.
The technique outlined, while not totally risk free, offers the following advantages:
- You get paid at least once a year from each share that you own.
- As you only buy shares of companies that are making money, there is a good chance that the shares will rise in price.
- You practically do not need much investment knowledge to implement this technique.
- Only a very small amount of time is needed to monitor your investment.
There are some small disadvantages to this technique:
- Since you do not attempt to time the market, your shares might drop in price over the short term.
- This is a "buy and forget" type of investment, so your time horizon should be from the medium to the long term. We are talking at least 5 to 10 years, although preferably you should just hold them until retirement and beyond.
The longer the time you have for implementing this technique, the more effective this technique becomes. Over time, as your dividend income increases, do try to reinvest at least a part of the income.
If you are a first time investor, I would understand if the above seems overwhelming. I would highly suggest that you consult a friend knowledgeable in stocks for their opinion on the above technique and how you can go about obtaining the data you need, and implementing the technique.
Dividend - Dividends are payments by a company to its shareholders. The payments can be made on a yearly, half-yearly or quarterly basis, but there is no hard and fast rules and it really depends on the company. Note that dividends are normally paid out from the profits of a company, but a company has no obligation to declare a dividend even if it is profitable.
Dividend Yield - This is the amount a company pays in dividends each year with respect to its share price. It is usually expressed as a percentage. It is calculated by taking the dividends received divided by the present amount you need to pay for the shares, and multiplying the result by 100.
Liquidity - When applied to shares trading on a stock exchange, it is a measure of how easy it is to trade in the share, that is, whether there are ready buyers and sellers for the share at a fair price. If the liquidity is good, then you should be able to buy or sell that share readily and at a fair price. But if the liquidity is bad, then you might not be able to trade the share easily, and even when there are buyers or sellers, the price bid or offered will probably be at a large premium or discount to the market price.
PE Ratio - This is a number that tells you how much money the company is making compared to its share price. The smaller this number is, the better the company is doing. Typical values of PE ratio would range from 5 to 20, but this also depends a lot on the company's sector and the economic climate.