Stock market investments can be one of the most reliable ways to build your wealth. That might be why nearly half of all Americans (45%) regret not investing more money in stocks.
If that regret sounds all too familiar, you’ve come to the right place. This guide can show you how to make money in the stock market by giving your investment portfolio a jump-start or a quick tune-up.
The Stock Market Explained: How Do You Make Money from Stocks?
A stock represents partial ownership in a publicly traded company. So if you purchase shares of stock from Microsoft or Amazon, you now own a small percentage of that company. The more shares you own, the greater your percentage of ownership.
How do you make money from stocks? By selling stock, a company increases its working capital, which helps it invest in its business. As a result, the company’s value goes up — and so does the value of its stock.
So for example, if you had bought $1,000 worth of Disney stock during the 2020 pandemic (when it hit a low of $79.07), it would be worth $1,263 as of April 2023. If you sold your shares, you’d make a profit of over 25%.
How to Make Money in the Stock Market
Profiting from stock trades assumes a basic strategy: buying low and selling high. Sounds simple, right? In some cases, it can be. But most investors will need to weigh their decisions carefully, and adopt some strategies to keep their portfolio growing. Here are some tips for how to make money in stocks.
Focus on Long-Term Growth
Beginning investors often dream of getting in on the ground floor of a hot new startup and making millions from its meteoric rise. But these are rare events. Your best investments will be the ones you make today and watch grow slowly over the course of time.
Focus on strong, stable companies, also known as “buy-and-hold stocks.” These provide stability as well as sustained, long-term growth.
On average, it takes about 7.2 years for your money to double in the stock market (based on an average rate of return of 10%). This means that if you invest $1,000 today, it will take about seven years for your shares to be worth $2,000. But give it another seven years and you’re sitting on $4,000. That’s why it pays to invest early and watch your money grow over time. The sooner you start investing, the greater your rewards.
Invest Regularly
Do you want to know how to make money in the stock market? Start by making investing a lifelong discipline. Make regular investments in your portfolio. That can mean adding new stocks to your collection or buying additional shares of the stocks you already possess.
Regular, steady investment allows your portfolio to grow over time and maximize your returns.
Some investors automate the process, diverting money from every paycheck to their investment account. That’s smart because it prevents you from forgetting to save money each month.
Most financial experts recommend that you allocate 15% to 20% of your monthly budget to savings and investments. Making this a regular priority will keep you on track toward your long-term investment goals.
Diversify Your Portfolio
Knowing how to make money in stocks is one thing. Knowing how to protect your investments is another. There’s no way to invest in stocks without incurring some risks. Not every company will be a winner, and the market itself can experience volatility brought on by broad economic trends.
Diversifying your portfolio involves buying stocks from multiple industries. If your portfolio contains a large number of tech stocks, you can balance it out by adding in some shares of consumer staples stocks or stocks from the healthcare industry.
Diversification is beneficial because if one economic sector takes a nosedive, your overall portfolio is spared from underperforming stocks.
Choose Funds Over Individual Stocks
Purchasing stocks doesn’t have to be the equivalent of ordering off a menu. Sure, you can buy individual stocks, but this can be a daunting task, especially for new investors.
Instead, consider purchasing a fund. In an investment fund, your money is pooled with other investors, allowing you to buy a collection of stocks — which also gives you some built-in diversity.
Common types of funds include:
- Mutual funds
- Exchange-traded funds (ETFs)
- Index funds
Index funds are designed to track a particular market index, such as the S&P 500 or the Nasdaq. The idea is simple: instead of trying to beat the market, simply track with the index.
Chances are that this approach will be just as beneficial as if you’d tried to select every stock on your own. That’s partly why Warren Buffett recommends index funds to new investors.
Research Thoroughly
It’s important to do your homework to learn how to make money from the stock market. That’s true regardless of whether you purchase a fund or buy individual stocks. Careful research can help you make informed investment decisions to maximize your investment. Look for factors like:
- Price-to-earnings ratio
- Beta value (determines risk)
- Leadership structure
- Position in the industry
Investors can gain access to this data from an investor’s newsletter. They might also look into a stock investing platform that provides them with research and tracking tools to monitor their portfolio and seize new opportunities.
Take Risks When You’re Young
The most reliable gains come from long-term investments in stable, time-tested companies. But does this mean there’s no room for splurging on that hot new tech startup you keep hearing about?
Actually, a little bit of risk can be a good thing. As long as you maintain a balanced, diversified portfolio, you have room to take on additional risk.
Young investors also have more bandwidth to absorb investment risk. That’s because they have more time to make adjustments to account for underperforming stocks. Stay diverse, stay balanced — but it’s okay to take a calculated risk now and then.
Things to Avoid When Investing in Stocks
Now that you know more about how to make money in stocks, you might be eager to get started. But before you do, consider a few words of caution. Here’s what to avoid when you start investing.
Exceeding Your Budget
Always set a budget for how much you wish to invest. Never, ever invest more than you’re prepared to lose. If you’re married, discuss this budget with your spouse and consider your family’s needs before you open an investment account.
Reacting to Short-Term Trends
The market is going to have its ups and downs. Don’t assume that these temporary trends represent long-term performance.
Just because things are looking up for a particular company doesn’t mean you should sink your entire budget into that one stock. Nor should a temporary downturn prompt you to start selling to cut your losses. Focus on the big picture and don’t react to short-term trends.
Attempting to Time the Market
Investors who “time the market” are trying to predict short-term shifts in order to maximize their profits. But a classic study has shown that even institutional investors aren’t always capable to do this with any real accuracy.
If you’re worried about market shifts, consider the dollar-cost-averaging method, where you invest slowly over the course of time.
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