Investing in the stock market is one of the world’s best ways to generate wealth. One of the major strengths of the stock market is that there are so many ways that you can profit from it.
But with great potential reward also comes great risk, especially if you’re looking to get rich quick. If you plan to dabble in short-term or aggressive market strategies, bear in mind that you’ll be risking the loss of some or even all of your investable funds.
Most of the strategies listed below will ultimately prove unprofitable for the average investor, and you should always talk with a financial advisor before you embark on any new, aggressive stock market strategy. However, if you want to take a shot with these methods with a small percentage of your portfolio, it may possibly help you generate outsized gains.
How do you make money in the stock market?
The way the stock market works — and works for you — is all about supply and demand, and the way those factors affect value. When you purchase assets like stock (a fractional ownership stake in a company), you’ll make money when the company does well and the stock price goes up. Then, as a company’s performance continues to improve, more investors want in on the action. As a result, those investors are willing to pay more for shares.
That means that the shares of stock you own have now increased in price, thanks to higher demand. If you sell your shares at a price higher than you paid, you’ll make money. Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.
You can also make money in stocks by:
- Earning dividends, which is a payment of profits to shareholders in stock or cash
- Investing in stock ETFs and mutual funds (which can help diversify your portfolio, too)
How to make money in stocks: 5 tips
You likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.
1. Take advantage of time
Although it’s possible to make money on the stock market in the short term, the real earning potential comes from long-term investing and the power of compound interest. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.
But in order to best take advantage of that exponential growth, you need to start investing as early as possible. For example, say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% rate of return.
If you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compounding.
2. Invest regularly
Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.
Let’s go back to our retirement example above — only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year.
If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.
Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period. We even have a list of the top brokerage accounts to help you get started.
3. Set it and forget it — mostly
If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.
For one thing, short-term trading like day trading lacks the tax benefits you get from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.
While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips like bear markets reverse themselves in time.
4. Stay diversified
All investing carries risk — it’s possible for some of the companies you invest in to underperform, or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.
By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.
5. Consider working with a pro
We hire experts for everything from our healthcare to plumbing needs. Your investments deserve the same kind of professional experience. Financial advisors can help you create an investing plan for the long term, and could prove to be the most important investment you make. Not only do pros know how to make money in stocks, they can also help you with a wide variety of personal finance topics like budgeting, planning for a college education or even estate planning.
And working with a financial advisor probably costs less than you think.
3 common stock market mistakes to avoid
1. Trying to time the market
One of the most common mistakes that investors make is letting their emotions derail their long-term plans, by buying or selling stock based on movement in the market. However, as we noted earlier, investing in the stock market is a marathon, not a sprint. While it might be hard to sit tight when the market is plummeting, keep in mind that the stock market has always recovered from downturns.
Acting on emotion and buying or selling stock based on movement in the market — or trying to time the market — is not a solid investing strategy. Instead, try dollar-cost-averaging, which is when you invest your money evenly and routinely over a longer period of time.
2. Picking the new, hot stock
Snapping up the buzziest new IPO might be tempting, and can certainly make investing feel exciting. However, experts generally recommend against picking and choosing individual stocks to invest in.
As we mentioned earlier in this article, you should maintain a diversified portfolio, and that doesn’t include just the latest and greatest new stocks. To do this, a better bet might be to consider index funds, which are made up of a well-diversified mix of stocks that replicate the makeup of an underlying index.
3. Not respecting your risk tolerance
Another major mistake that new investors can make is not respecting their risk tolerance, and either taking on too much or too little risk. Your risk tolerance is based on an array of factors, like your time horizon and personal comfort level, and it should be the basis for the asset allocation of your portfolio.
If you take on too much risk, you can face big losses or be forced to cash out of the market too soon. On the other hand, play it too safe, and you can miss out on compounding gains. A key to making money from the stock market is figuring out your risk tolerance, and then abiding by it.
Now that you know how to make money from stocks, think about your next move.
Three excuses that keep you from making money investing
The stock market is the only market where the goods go on sale and everyone becomes too afraid to buy. That may sound silly, but it’s exactly what happens when the market dips even a few percent, as it often does. Investors become scared and sell in a panic. Yet when prices rise, investors plunge in headlong. It’s a perfect recipe for “buying high and selling low.”
To avoid both of these extremes, investors have to understand the typical lies they tell themselves. Here are three of the biggest:
1. ‘I’ll wait until the stock market is safe to invest.’
This excuse is used by investors after stocks have declined, when they’re too afraid to buy into the market. Maybe stocks have been declining a few days in a row or perhaps they’ve been on a long-term decline. But when investors say they’re waiting for it to be safe, they mean they’re waiting for prices to climb. So waiting for (the perception of) safety is just a way to end up paying higher prices, and indeed it is often merely a perception of safety that investors are paying for.
What drives this behavior: Fear is the guiding emotion, but psychologists call this more specific behavior “loss aversion.” That is, investors would rather avoid a short-term loss at any cost than achieve a longer-term gain. So when you feel pain at losing money, you’re likely to do anything to stop that hurt. So you sell stocks or don’t buy even when prices are cheap.
2. ‘I’ll buy back in next week when it’s lower.’
This excuse is used by would-be buyers as they wait for the stock to drop. But investors never know which way stocks will move on any given day, especially in the short term. A stock or market could just as easily rise as fall next week. Smart investors buy stocks when they’re cheap and hold them over time.
What drives this behavior: It could be fear or greed. The fearful investor may worry the stock is going to fall before next week and waits, while the greedy investor expects a fall but wants to try to get a much better price than today’s.
3. ‘I’m bored of this stock, so I’m selling.’
This excuse is used by investors who need excitement from their investments, like action in a casino. But smart investing is actually boring. The best investors sit on their stocks for years and years, letting them compound gains. Investing is not a quick-hit game, usually. All the gains come while you wait, not while you’re trading in and out of the market.
What drives this behavior: an investor’s desire for excitement. That desire may be fueled by the misguided notion that successful investors are trading every day to earn big gains. While some traders do successfully do this, even they are ruthlessly and rationally focused on the outcome. For them, it’s not about excitement but rather making money, so they avoid emotional decision-making.
