The stock market is not a casino. It's a place to buy ownership stakes in companies. If you think of it like that it makes it a bit easier to grasp that you're not just buying pieces of paper. For instance, Johnson & Johnson is made up of 2.7 billion shares. If you buy 100 shares of JNJ you own 100/2.7 billion of the company. As such, your portion of the $16.5 billion in profits they made last year is $785. That ownership stake also entitles you to a portion of their quarterly dividend payment. A dividend is the portion of the profits the company's management decides to share with the owners. You will receive $325 for every 100 shares of JNJ you own this year.
So, knowing that, how do we get wealthy in the stock market? It really boils down to this:
- You must concetrate your stock market purchases on high-quality companies. These are companies that constantly grow their earnings regardless of how the overall economy is performing and don't rely on an overabundance of debt.
- Once you've identified a great company you have to patiently wait to buy it at a fair price. Most of the great US companies are overvalued at the present time, in my opinion. But not all of them.
- Don't sell. Just take sell out of your vocabulary. Never sell a great company. You will almost surely end up regretting it.
- Give it time. You can take a modest sum and turn it into a massive fortune if you have enough decades to let your company's earnings compound. It often takes 25-40 years for the miracle of compounding to produce truly outstanding investment results.
There are no short cuts. You'll waste your precious time and money trying to trade your way to riches and you'll end up with nothing but regrets if you start playing with options. Just buy great companies at good prices, hold onto them for dear life and let the companies themselves do the hard work of growing their earnings. The price of the stock reflects the earnings power of the company you own.
Disclosure: Long JNJ