Exactly how you make money in the stock market?

Question

I get that you buy stocks and the stocks go up or down every day, but why do people leave money in it for longer than a year? If the stock market goes up and down, wouldn't you want to take your money out when it is really high? I don't get why some people would leave money in the stocket market even when it is at a high selling price. Or does the stock market go up and down all the time, but in the end always goes up in price, like anually or something?
I know this sort of sounds i little complicated, but its the best i could word it...
also...about how much do you get from dividends and are there any safe investment stocks [aka "blue chip" stocksi think they are called] (you dont have to name any if you dont know any, im just wondering) that pay about 5% interest, maybe more?

Answer 1

You have a very good question to which there are various different philosophies. So there may not be a correct answer.

Approach 1. Stocks tend to rise in price of companies whose earnings rise. Therefore if one invests in those types of companies, over a long period of time--20 years--the increase in value of your investments will be great. In general you can figure about 10% annually, more or less. Some companies earning have grown at a much higher rate than that, WalMart, Home Depot, McDonalds, Disney for example. The really big advantage to this approach is that the investment grows without being taxed until liquidated so that 10% annual growth is tax deferred. Then when it is liquidated the tax paid is about 1/2 the tax on regular income.

Approach 2. The value of stocks do tend to run in cycles of about 10 years more or less. The number of years is not a hard and fast figure. It can very greatly. When stocks are high piced, normally determined by average PE ratio, a time just around the corner somewhere will come when the valuation of stocks will tend to drop perhaps greatly. The last time this happened was in 2001. Some stocks dropped in price by a factor of 5. Intel was one. Consequently, it certainly does make sense to at least sell a portion of ones investments when stocks are very high priced and put the money into more conservative investments until after the shakeout. Taxes are somewhat of a concern with such a strategy and they have a bearning on whether one holds on while the prices drop or bail out and shell out to the tax man.

Approach 3. Stock prices tend to go up and down on a daily, weekly, and other cycles also. A school of thought is that if one buys when stocks are below their average in the cycle and are sold when they are above their average in the cycle a lot of money can be made. Taxes are just a necessary evil but not all trades will actually make money so the losses can offset the gains. And the whole exercise is an attempt to outguess the market anyway. This approach requires a lot of time and effort but there is a really large number of people participating in this approach.

Stocks that pay about 5% dividends. They do not pay interest, bonds pay interest. There is a big difference at tax time. Dividends are taxed at about 1/2 the normal rate. Interest is taxed at the full tax rate unless it is interest from municiple bonds.

I am not sure if there are any blue chip stocks that pay 5% or not. There are certainly some that pay close to 5%. BAC is one. It pays about 4.5%. NCC pays about 4.6% USB pays about 4.8%. It may not be classified as a blue chip however. All three are bank stocks. AZN a drug company pays about 4.6%. PFE pays about 4.5% another drug company.

Although all of these companies do not currently pay 5%, several of these have increased their dividends annually, so a couple of years from now chances are excellent they will be paying 5%. Ten years from now they will be paying about 10% based on your original cost.

Answer 2

A classic dilema....

Sounds easy doesnt it??? sell when high.. buy when low.

But how do you determine what is high and what is low? it's not based purely on price.... a 100$ stock might actually be cheaper than a 1$ stock depending on what you're measuring stick is ... is it P/E, P/B, P/Cashflow.. or some hybrid of 12 measurements!.

over the history of the stock market it has almost always been higher at the end of any 10 year period .... however stocks themselves come and go... there was a period that Wagon Manufacturers were traded on the stock exchange....
Their stocks started to fall when the automobile was gaining in popularity... and i'm sure some old man stood at the exchange and said ... "these damn noisy cars will never replace carriges... i'm shorting Ford and going long Stable Wagons on margin with half my net worth"

In general i'd say most large-cap blue chips stocks yield about 3%.. lately banks seem to have the most stability in earnings, price per share and highest yield... Bank of America yields 4.5% and Washington Mutual yields 5%

Beware of HIGH yielding stock like Oil trusts and Reits... as there is a lot of risk in anything trying to pay out 11% consistantly...

anyways.. hope that helps a little

Answer 3

people stay invested in the stock market mainly for tax reasons or they have purchased the stock at a very low price years ago and dont want to give that "position" up because they are still bullish on the stock.

the main reason people don't sell stock is the "buy and hold" strategy. they are only going to sell the stock when they retire or need the money.

also, in many retirement accounts - there is a penalty for liquidating the account - in an IRA you can trade in and out of stocks as much as your like - but you can't withdrawl. also many people invest a little money at a time over their lifespan.

also, it is very difficult to time the market - most people don't have time to stay on top of what the market is doing, but want the appreciation that stocks have averaged throughout history.

most blue chip stocks only yield around 4% tops - so getting anything higher than that means you are taking on added risk, which may or may not pan out.

Answer 4

Bottom line, it's risky. No one knows what the market is going to do, Take a look at Wal-Mart stock, it goes up and down daily. Not much change, a dollar maybe? You would be better off putting your money in a savings account. A friend of mine trades/buys stock online, he averages a break even at the end of the year, If you have the time and the money to play that game do some research before jumping in.
Good luck

Answer 5

No one knows when stocks are at their highest price, or they would sell just before it to be sure they got out and no one would pay the highest price since they would have to be the one to lose money.

When you buy stocks you are buying the future income of the company you are buying. In many cases, that income increases faster than any other thing you could own so you would want to hold it, unless you could buy a better income stream in another company. So you should buy the most valuable income stream you can buy, and sell it when people in the future are willing to pay more for that income stream than another you could buy.

These assets swing wildly in the short run, but the effect of the income increases reduces the effects of the swings over time, reducing risk. Profits tend to rise, and risk tends to fall as long periods of time pass.