curious how to make money in stocks? You’re asking the right question, because investing in stocks is one of the most significant steps you can take to build wealth.
To make money in the stock market, you need to give your investments time to accrue interest and appreciate in value, as well as make sure you diversify your holdings and invest on a regular cadence.
how do you make money on the stock market?
The way the stock market works, and works for you, has to do with supply and demand, and how those factors affect value. When you buy assets like stocks (a fractional ownership stake in a company), you will make money when the company does well and the stock price rises. then, as a company’s performance continues to improve, more investors want to get in on the action. As a result, those investors are willing to pay more for the stock.
that means the shares you own now have risen in price, thanks to higher demand. If you sell your shares at a higher price than you paid, you will earn money. Of course, it is also possible for stocks and other market shares to lose value, which is why there is no such thing as a risk-free investment.
You can also earn money on stocks in the following ways:
- earn dividends, which is a payment of earnings to shareholders in stock or cash
- invest in stocks, ETFs and mutual funds (which can also help diversify your portfolio)
how to make money on stocks: 5 tips
You probably won’t see significant growth without taking into account some basic market principles and best practices. Here’s how to make sure your portfolio does as much of the work as possible for you.
1. take advantage of the time
While it’s possible to make money in the stock market in the short term, the true earning potential comes from long-term investing and the power of compound interest. As the value of your assets increases, the total amount of money in your account grows, leaving room for even more capital gains. this is how stock market profits increase exponentially over time.
But to take full advantage of that exponential growth, you need to start investing as soon as possible. For example, let’s say she put $1,000 in her retirement account at age 20, with plans to hang up her work hat at age 70. Even if you don’t put anything else into the account, you’ll have more than $18,000 to look forward to after 50 years. of growth, assuming a relatively modest rate of return of 6%.
If you waited until age 60 to make that initial deposit, you would make 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 keep saving.
Let’s go back to our previous retirement example, 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 would have saved about $325,000 by the time you turned 70. even if you waited until you were 60 to start saving, you’d end up with about $15,000, a far cry from the measly $1,800 you’d get if you just made the initial deposit.
Making regular contributions doesn’t require much effort; You can easily automate the process through your 401(k) or brokerage account by 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.
First, short-term trading, such as day trading, lacks the tax benefits you get from holding your investments longer. If you sell a stock before you own it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains—stocks you’ve owned for more than a year.
While there are certain situations that require you to take a look at your values, for the most part, even severe market declines, such as bear markets, reverse over time.
4. stay diversified
All investments carry risk: some of the companies you invest in may underperform or even go completely bankrupt. But if you diversify your portfolio, you’ll be protected against losing all of your assets when investments don’t go as planned.
By making sure you’re investing in many different types of securities, you’ll be better prepared to weather stock market corrections. it’s unlikely that all industries and businesses will suffer equally or have the same level of success, so you can hedge your bets by buying a little of everything.
5. consider working with a professional
We hire experts for everything from our medical care to plumbing needs. your investments deserve the same kind of professional expertise. financial advisors can help you create a long-term investment plan and it could be the most important investment you make. Professionals not only know how to make money with stocks, they can also help you with a wide variety of personal finance topics, such as budgeting, planning for a college education, or even estate planning.
and working with a financial advisor will probably cost less than you think.
three common stock market mistakes to avoid
1. trying to time the market
One of the most common mistakes investors make is letting their emotions derail their long-term plans, buying or selling stocks based on market movement. however, as we noted earlier, investing in the stock market is a marathon, not a sprint. While it can be hard to sit still when the market is plummeting, keep in mind that the stock market has always bounced back from downturns.
Acting on emotion and buying or selling stocks based on market movement, or trying to time the market, is not a sound investment strategy. instead, try dollar cost averaging, which is when you invest your money evenly and routinely over a longer period of time.
2. picking up the hot new stock
Catching the hottest new IPO can be tempting and can certainly make investing exciting. however, experts generally recommend against choosing individual stocks to invest in.
As we mentioned earlier in this article, you should maintain a diversified portfolio, and that doesn’t just include the latest and greatest new stocks. To do this, a better option might be to consider index funds, which are made up of a well-diversified mix of stocks that track the composition of an underlying index.
3. not respecting your risk tolerance
Another big mistake new investors can make is not respecting their risk tolerance and taking on too much or too little risk. Your risk tolerance is based on a number of factors, including your time horizon and personal comfort level, and should be the basis for your portfolio’s asset allocation.
If you take on too much risk, you may face huge losses or be forced to withdraw from the market too soon. on the other hand, if you play too safe, you can lose compounded winnings. One key to making money in the stock market is to determine your risk tolerance and then stick to it.
Now that you know how to make money with stocks, think about your next move. some of the next steps you could take could be:
- open an online brokerage account to start building your portfolio.
- explore robotic advisors, which can help you put your wealth building on autopilot.
- read about what to look for a financial advisor using our free e-book.
The “find a financial advisor” links in this article will direct you to web pages dedicated to magnifymoney advisor (“mma”). After completing a short questionnaire, you will be connected with certain financial advisors who participate in the MMA referral program, which may or may not include the investment advisors listed.