How can you make money through stock investing? Let’s explore the two key principles for earning steady returns: stable dividend income and capital gains.
Basic Principles of Stock Investing and Ways to Generate Returns
A stock is a certificate representing ownership of a company, and a person who owns a stock is called a shareholder. You, too, can become an owner of a company. All you need to do is pay a fair price commensurate with the value of that company’s stock. In return, the corporation distributes responsibilities, rights, and profits to each shareholder in proportion to the amount of money they have invested in the company. This is the basic principle of “stock investing.”
So, how can you make money through stock investing? There are two methods. One is receiving “dividends.” You invest in a company expected to turn a profit, and when the company generates earnings, shareholders receive dividends. The more shares you hold, the more dividends you receive. This is a way of reaping benefits as a shareholder in return for trusting and investing in the company, and it aligns more closely with the original meaning of stocks. Some companies pay small dividends or none at all. While some may be unable to pay dividends due to a lack of profits, many choose to retain earnings as “retained earnings” rather than distributing them. This can be seen as a strategy to build the company’s financial foundation and prepare for the future. Consequently, in the actual stock market, shares of companies that pay high dividends are specifically categorized as “dividend stocks.”
The other method is to earn capital gains from fluctuations in the stock price. You buy when the price is low and sell when it rises to make a profit. Generally, when people say they are “investing in stocks,” they are referring to earning capital gains rather than receiving dividends.
Just because it’s easy to start doesn’t mean it’s easy to make money
Why do people invest in stocks? First, because it’s possible to generate enormous returns depending on one’s ability. In reality, whether you’ve analyzed the market well, bought a stock on someone’s recommendation without thinking, invested in manipulated stocks (which is illegal), or bought blindly without knowing anything—as long as the outcome is favorable, you can earn massive capital gains. Even when interest rates are low and it’s impossible to achieve a 10% annual return on savings, stocks can yield returns of 200% or 300%.
The second reason is the high probability of making a profit in a short period. The reason people passionate about stock investing use high-spec PCs and multiple monitors is to “buy low and sell high” at the most opportune moment. While savings require tying up money in a bank for at least a year, stocks can be bought and sold dozens or even hundreds of times a day. Real estate is also a high-yield investment, but compared to stocks, it takes much longer to buy and sell.
The third reason is taxes. When earning interest on a savings account, you typically have to pay a 15.4% income tax. However, when trading stocks, you only have to pay a very low transaction tax—and even then, only the seller pays it. While transaction fees may apply in addition to taxes, even when factoring these in (assuming the same rate of return), you can take home more money from stock investments than from savings accounts. Real estate-related taxes are trending toward ever-stricter regulations. In contrast, stock-related taxes have not yet seen significant changes. This is why many people find stock investing attractive.
Nothing in this world has only advantages. Just as you can earn enormous profits from stocks, you can also incur massive losses—and in a very short period of time. If you buy and sell stocks too casually, thinking that low taxes mean you can sacrifice your daily life to it, you may end up wasting your time and compromising your health. Even with low taxes and fees, if you keep trading without making a profit, your account balance will inevitably run dry. You might wonder, “Can’t I make money by becoming a full-time investor?” When you have this thought, take a look around you. How many successful full-time investors do you see in your circle? There probably aren’t as many as you’d think.
That’s how challenging stock investing really is
Bookstores are lined with new releases promising to teach you how to succeed in the stock market.
Turn on the TV, and economic programs analyze various stocks. The reason stock-related information is so readily available is that the barrier to entry for stock investing is low. However, you must never underestimate stock investing. The joke, “To make $100,000 in the stock market, you just need to start with $200,000,” didn’t come out of nowhere.
Observe Market Conditions with a Long-Term Perspective
The amount of money circulating in the stock market is truly staggering. Consequently, even the slightest price movement can result in massive gains or losses. The total value of all the money moving in the stock market is called the “market capitalization.” Market capitalization is calculated as “number of shares × market price,” and since both the number of shares and their prices change daily, market capitalization also varies from day to day. As of the end of 2024, the U.S. stock market’s market capitalization reached an all-time high of approximately $63.8 trillion. This represents an increase of over $10 trillion in a single year—a figure that exceeds the total GDP of many major economies. In particular, major tech companies known as the “Magnificent Seven” have driven market growth, and their combined market capitalization is larger than that of the entire European stock market. Given the sheer scale, fluctuations in stock prices inevitably have a significant impact on the economy. Even a 1% movement in stock prices results in $638 billion changing hands.
That is why the state of the stock market—or “market conditions,” for short—is always a hot topic. Just looking at economic news, related articles pour out daily. People who don’t own stocks might think that whatever happens in the stock market has nothing to do with them. Is that really the case? Of course, it may not have an immediate, direct impact on your life. However, since the economy is interconnected, when other people’s money moves, your money eventually moves too. Therefore, even if you don’t hold stocks in your hands, it’s wise to always keep an eye on stock-related news.
One point to note here is that stock price fluctuations do not always align with economic trends. This is because the stock market moves not only in response to the real economy but also based on investor sentiment. People invest in what they think will go up; they do not invest in what has already gone up. Investing in something that has already risen is called “buying at the top,” which means the stock price has reached its peak and is bound to fall. That is why retail investors (individual investors) are the ones who usually get caught at the top. Furthermore, while the stock market fluctuates daily, the real economy does not change drastically unless there are exceptional circumstances, such as war.
Therefore, for short-term investors, daily stock price fluctuations are important, whereas for those looking at the broader economy, medium- to long-term trends are more important. If you don’t currently own any stocks, you should focus on the overall trend rather than obsessing over individual stock prices. The stock market is a jungle where highly skilled experts with immense expertise employ sophisticated strategies. Retail investors can never move the market. It is large institutional investors and foreign investors, who manage massive amounts of capital, that shake the stock market. Retail investors can only ride that wave to earn modest returns.
