When I first started investing, I read an analogy between farming and investing. By comparing the two, I thought it was a brilliant way to explain the benefits of investing to a newbie as it eliminated the jargon and complexities associated with the workings of the stock exchange.
Understanding the stock market and using it to good advantage as an investment vehicle is a bit like understanding farming.
Much like Farming, the stock markets High Risk and Potentially Highly Rewarding.
The fortunes of a farmer rise and fall in line with variations in the weather and any underlying changes in the climate. This assumes, of course, the proper selection of good high quality seeds which have been planted on fertile soil. And above all else, the farmer has sound management skill and experience to control the farming process and produce the desired results and outcomes.
An investor on the stock market can expect a similar relationship in the fortunes of their investment in company shares. The price of company shares will sometimes rise in the same way that a farmer’s expectation of a good bumper crop harvest rises with good rains. Conversely, share prices will also sometimes fall in the same way that poor rains or draught spell calamity for the farmer.
Does this mean that investing in the stock market is a risky business?
Yes – in exactly the same way that farming is an inherently risky business – and yet this does not stop many good farmers and even novices from continually farming, as a living, or simply experimenting and trying it out in order to receive some satisfaction and rewarding returns. And asa result of this, they generally create and build individual wealth for themselves and contribute to national output and employment.
Farmers, like investors, through experience have gained over time by carefully observing the climate and patters for clues from nature. For example, by crop-rotation or planting 2 – 3 crops in one field, a farmer seeks to increase yields and minimise the risk of total loss as would surely happen someday if the farmer concentrated solely on one crop year in year outfox too long.
Investors in the same way use ‘crop-rotation’ or diversification and buy several different stocks that are available on the stock market.
The stock market is like milking a cow.
Continuing with the farming analogy, dividends and capital gains can be best explained by the following.
Think of owning shares as similar to owning cows. This makes it simple and practical to consider and view dividends from a company as being like milk from a cow and any bonus issue of shares of shares received from a company are like a cow’s offspring.
The farming analogy is a useful learning tool for al those seeking to use the stock market for investments, savings, income or long term wealth appreciation. Like Farming, investing on the stock market carries with it some risk. These risks however can be contained and managed to yield potentially high attractive gains as income in the form of regular dividend receipts or wealth through the long term price appreciation of shares.