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. But, if you want to speculate with a small percentage of your portfolio, they may possibly help you generate outsized gains. Always talk with your financial advisor before you embark on any new, aggressive stock market strategy.
The Basics of Stocks
Stocks make up an important part of any investor’s portfolio. These are shares in a publicly-traded company that are listed on a stock exchange. The percentage of stocks you hold, what kind of industries in which you invest, and how long you hold them depend on your age, risk tolerance, and your overall investment goals.
Discount brokers, advisors, and other financial professionals can pull up statistics showing stocks have generated outstanding returns for decades. However, holding the wrong stocks can just as easily destroy fortunes and deny shareholders more lucrative profit-making opportunities.
In addition, those bullet points won’t stop the pain in your gut during the next bear market, when the Dow Jones Industrial Average (DJIA) could drop more than 50%, as it did between October 2007 and March 2009
Can I Become Rich By Investing In The Stock Market?
For new investors, we present a simple guide for understanding the stock market and identifying stocks that are likely to have a strong return.
Speaking of diversifying, the RBI of India has permitted investors to invest an amount in US stocks. Most of the stocks are traded on an exchange such as NASDAQ. Some of the best NASDAQ stocks of the year include Workday WDAY, Nvidia NVDA, Zoom Video Communication ZM, Tesla shares, Jd.com JD, Marriott Int MAR, Apple AAPL, Expedia Group EXPE, and Ulta Beauty ULTA.
A stock market, also known as an equity market or share market, is an auction where several buyers and sellers join to carry out the purchase and selling of stocks. Purchasing a share of a company means you are given legal ownership for a part of the company.
Is Investing in Stocks Similar to Gambling?
“Investing in the stock market is just like gambling at a casino.” This is a phrase we all have heard at least once in our life. But how much of it is true? In both, investing and gambling the key goal is to minimize risk and maximize profits. The difference lies in the returns that are generated i.e, it is likely that stocks will give positive returns in the long run which is not the case with gambling.
Investors generally have access to quantifiable information which can be used to make an informed decision before investing. But gamblers do not have that privilege as it is a game of chance. Apart from that, offsetting losses is much easier in the case of investing than gambling. Therefore, it is safe to say Investing and gambling are not similar.
How do Beginners Make Money in the Stock Market?
You don’t need a degree in finance or Warren Buffett as your uncle to make money in the stock market. Even beginners in the stock market can make sound decisions and earn money through stock exchanges.
While it’s true you “need money to make money” in the stock market, you can get started with small amounts.
Start investing early, if possible, so you can stay invested and give your wealth more time to increase. Plan on staying invested as long as possible.
The first step for someone who wants to invest is to open an account, preferably with investing apps meant for beginners or the best robo-advisors, to build a diversified portfolio automatically.
In either case, choose an established, trusted brokerage firm that has minimal or no fees.
You can connect your brokerage account to another bank account to deposit money, or you may be able to get an employer to deposit some of your pay directly.
From there, you have the choice of investing in stocks, index funds, and more. Don’t try short selling stocks on day one or go “all in” on a penny stock or “lucky stock pick” you heard two strangers discussing.
Consider using one of the many trusted stock picking services out there that vet investments and give you a place to start. As a beginner, you should start with safer, long-term investments.
There is always the possibility of losing money when you buy and sell stocks.
The good news is there are several ways to minimize your risk of losing money investing. Follow the tips below to make as much money as possible from the stock market.
Understand the Stock Market and Stay Focused
When it comes to growing your wealth in the stock market, you need to have a working understanding of the stock market itself and be comfortable with long-term investing. Very few people become overnight millionaires off of a lucky stock pick, so don’t count on that happening to you. You can use financial advisor if you need help getting started. The Paladin Registry, for example, is a service that connects investors with certified advisors who are fiduciaries (that means they are required to act in your best interest).
Stay focused on your investment goals and stay calm in down periods. Let the market work for you.
Start investing early
The best way to make money in the stock market is to invest for the long term. In other words, buy strong investments and hold onto them for as long as possible — ideally at least a few decades.
To give your money as much time as possible to grow, it’s best to start investing as early in life as you can. Of course, if you’re off to a late start, you can’t go back in time. But starting to invest now is better than waiting, even if you don’t have much cash to spare.
Say, for example, you’re 35 years old and are just beginning to invest. Right now, you can afford to invest $200 per month, and your investments are earning a 7% average annual rate of return. At that rate, you’d have around $227,000 saved by age 65.
Now, let’s say that instead of starting to invest at age 35, you waited until age 45. At that age, though, you can afford to invest $400 per month, while still earning a 7% average annual return. In this scenario, you’d have roughly $197,000 at age 65. Even though you’re investing twice as much each month, your savings would still fall short of what you’d have by starting to save earlier in life.
Develop an Investing Strategy
Your investment strategy is a set of rules or guidelines to help you decide when you should or shouldn’t invest. Having a set strategy will keep you from making impulsive decisions out of hope or fear.
Fundamental analysis and technical analysis are the two dominant types of investing strategies. Fundamental analysts concentrate on measuring what they believe to be a stock’s intrinsic value.
This investment style assumes the current stock price doesn’t necessarily reflect the intrinsic value, and stock prices eventually correct themselves to match their true value.
Therefore, if a stock is currently undervalued, it might be wise to buy it as a long-term investment.
To determine the intrinsic value, fundamental analysts look at various metrics, such as price-to-earnings ratios, price-to-sales ratios, debt-to-equity ratios, PEG ratios, free cash flow, and much more.
They often use stock research and analysis apps to drill down into the data to understand the stock better. Fundamental analysis is a strategy for long-term investors.
Technical analysts try to figure out a stock’s future price by evaluating patterns and trends. They will look at past performance, simple moving averages, momentum indicators, trendlines, support and resistance levels, and more.
This investing style is mainly used by day traders and swing traders who make short-term investments. The market price is more critical to technical analysis than whether the share price makes sense.
Investors who increased their wealth from GameStop used technical analysis. Technical analysts believe price movements aren’t random, and price trends have a tendency to repeat themselves.
Some investors use a combination of both strategies, and your strategy will also include other factors.
For example, you might have a breakdown of what percentage of your investments you want to be individual stocks versus ETFs, etc. You might choose only U.S. investments or always have a certain amount of foreign exposure.
Make a list of all the valuation metrics you need to check when considering an investment. Decide ahead of time what metric numbers mean a stock or other investment has passed your tests.
Diversify your portfolio
Diversifying your portfolio involves buying multiple stocks from a variety of industries to limit your risk. This way, if one or two of your stocks don’t perform well, it shouldn’t have a drastic effect on your overall portfolio.
If you’re buying individual stocks, try to invest in at least a dozen or so different companies from multiple industries. If you’re buying funds, like mutual funds or ETFs, that can make it easier to diversify, since each fund may contain hundreds of stocks. However, it’s still a good idea to make sure the funds contain stocks from a variety of industries. Even if you’re invested in hundreds of stocks, if they’re all from one sector, that increases your risk.
It’s possible to make a lot of money in the stock market, as long as you have the right strategy. Regardless of how much you can afford to invest, these three guidelines can help you start building wealth today.
Buy and Hold
What the Apple example clearly shows is that buying and holding a stock can be enormously beneficial for your finances. “Buy and hold” refers to buying stock shares and holding on to them for the long term, even when the stock market is down.
Most legendary investors preach the glory of the buy-and-hold method. In 2016, Warren Buffet said, “The money is made in investments by investing and by owning good companies for long periods of time.”
Short selling is the opposite strategy of buy and hold. People are looking to make money in the market in a shorter time frame, and they do that by “shorting” stocks.
Here’s the gist: You borrow stocks and sell them at current market prices and receive a cash payment. But since you’ve only borrowed the stocks, you need to replace the stock that you sold. And you are responsible for paying dividends for the length of time that you borrow the stock.
When people short sell, they want the stock to drop sharply so they can buy it back at a much cheaper price. This means they can take home the difference. And sometimes the difference is a lot of money, which makes short selling a way you could get rich in the stock market.
Shorting the market requires a knowledge of the market and an educated guess on when the stocks will go down. You don’t want to borrow them for too long, because you’ll end up owing a lot in dividends. If you’re interested in short selling, you can buy and sell stocks through a brokerage firm like E*TRADE.
Sell Stocks that Generate Losses, Let Your Profits Run On
One of the most successful investors in history, David Ricardo, used math to calculate differences between an investment’s market price and its intrinsic value. Doing so identified mispriced securities worth buying for his portfolio.
Through doing this, he developed simple golden rules he found well worth following:
- Cut short your losses
- Let your profits run on
He means to say here, by cutting short your losses, that you should sell a stock immediately should its price fall or show signs of wavering. Doing so limits your downside.
He also recommends letting your profits run on, meaning continuing to hold for long periods, so long as the investment continues to perform well.
Services like the Motley Fool take these investing rules to mind when recommending stocks. Specifically, the service’s co-founder, David Gardner, believes in “[letting] your winners run [high]” while avoiding the idea of “locking in gains.”
They only recommend the best companies to make you rich in the stock market with a minimum investment period of five years. David Ricardo would have approved of their service based on performance alone.
How Do You Take Profits From Stocks?
The ultimate aim of every investor is to make a profit from their stocks, of course. But knowing when to actually cash out and take that profit, locking in gains, is a key question, and there’s no one right answer. Much depends on an investor’s risk tolerance and time horizon—that is, how long they can afford to wait for the stock to earn, vis-a-vis how much profit they want to earn.
Don’t be greedy. Some financial pros recommend taking a profit after a stock has appreciated around 20% to 25% in price—even if it still seems to be rising. “The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again,” as Investor’s Business Daily founder William O’Neil put it.
Other advisors use a more complex rule of thumb, involving gradual profit-taking. Jeffrey Hirsch, chief market strategist at Probabilities Fund Management and editor-in-chief of The Stock Market Almanac, for example, has an “up 40%, sell 20%” strategy: When a stock goes up by 40%, sell 20% of the position; when it goes up another 40%, sell another 20%, and so on.10
There are no easy ways to get rich quick. But there are many ways to do it slowly.
After all, to quote Warren Buffett one more time:
The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.
If you have a long time horizon, you can achieve tremendous success by following a methodical buying strategy, and then letting time be on your side and do the work for you.
Dollar cost averaging, averaging up, adding on sell-offs unrelated to the underlying business, adding at lower valuation multiples over time and enrolling in DRIPs are all fantastic ways to make you rich. As long as you are willing to give it the time it deserves.