Image source: Getty Images
Some people who don’t know the stock market that well think it’s like a casino. Yet investing in the FTSE 100 isn’t the same as a 50:50 roll of the dice to win or lose. In fact, there are several ways that I can use the main index to boost my long-term wealth if I start today.
Income
One angle I’ve found to be very beneficial in recent years is income generation from dividend stocks. I can see the history and payment schedule for a company. This usually coincides with the release of earning reports. If I own the stock in time, I’m eligible to get paid the dividend.
By comparing the dividend per share to the current share price, I can easily calculate the dividend yield as a percentage. This makes it straightforward to be able to compare different shares.
Some say that with interest rates now above 5%, it doesn’t make sense to take on added risk by buying a dividend stock. I take this point for low-yielding options. Yet there are still plenty of stocks in the FTSE 100 with yields between 5-9% where I feel the risk relative to the added reward stacks up to buy.
Investment provisions
An added way I can boost my return is by making use of provisions from the government. An ISA is a great example. If I invest via a Stocks and Shares ISA, I don’t have to pay capital gains or dividend tax from anything that happens within the account.
This already can help me to make more money that I would normally. Capital gains tax in excess of my normal allowance can be taxed at between 10-28%. So if I sell a stock for a profit, I’d lose a chunk of the profit in tax. Yet by making use of the ISA, I can retain more of the money.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Compounding returns
I can make money from a method like getting a dividend cheque and then spending it. Yet a different way to generate wealth for the longer term is to activate compounding.
This strategy involves taking a dividend and reinvesting it straight away. Over time, it acts as a way to speed up the growth of a portfolio.
For example, say I had £1,000 in a stock and received a 6% yield (£60). If I invest this, my total size is £1,060. Next year, a 6% yield would pay me £63.60. Over time, this should continue to build.
Capital growth
Arguably the most traditional way to make money from the market is from capital growth. This refers to when I buy a stock with a share price of 100p and the stock increases in value. If the stock hits 200p, I’ll have doubled my initial amount.
It’s not easy to generate these type of returns, even with popular growth stocks. Yet each year there are some stand-out performers. Rolls-Royce shares are up 178% over the past year.
Even though the stock market isn’t a casino, I could still lose all of my investable money. The share price of a company could fall to zero if it goes bust. So I have to be very careful to diversify my cash to different stocks, and take advantage of different ideas.
