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When a business is doing well, its stock prices are higher. When it’s not doing well, its stock prices are lower.
There are two ways you can earn money from stocks.
Appreciation – when the price of your stock goes up, you can sell your stocks.
Imagine you purchased a thousand stocks at $100 apiece. Over time, your stocks go up and up and up — until they are worth $200 each.
You could cash out and sell your stocks for $200 each — congratulations — you earned $100,000! Or, you can reinvest your earnings and try to get that $100,000 to earn even more money.
Dividends – When a company is doing well, its board of directors distributes a portion of its earnings back to the stockholders.
Cash dividends return cash to stockholders.
Stock dividends give more shares to stockholders. It's a way for investors to compound their investments.
Reinvesting dividends, over decades, is how people like Grace Groner and Sylvia Bloom ended up as multi-millionaires, even without big salaries.
So, instead of thinking about how you can turn your earnings into cash, think about how much wealth you’ll build by continually reinvesting your stock earnings.
Investing versus Saving
Investing is best for long-term goals, like retirement. Investing gives you growth over liquid assets and counters inflation. Your money is working on itself, whether the economy is booming, the area you’ve got real estate in is rising or you’ve backed a startup that is taking off. The money you’ve invested will have a return when you go to use it down the road.
Saving is best for short-term goals where you can easily access this money. The downside of stashing the money away in a high-yield savings account or Certificate of Deposit (CD) is inflation, currently at 3%. This means that if you put $100 dollars in your sock drawer for next year, your spending power will be roughly $97. You effectively have less money than the previous year.
