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With news about meme stocks increasing daily, it may be time to take a step back to remember what investing in stocks is all about.
However, the perception may be a bit distorted based on what you watch or read. Especially when you are new and learning how to start investing.
You hear about fortunes made and lost on stocks while some people say small returns are the name of the game, but it’s important to remember that a stock is a tool.
Really, it’s an assortment of tools like a Swiss army knife.
We want to go back to the basics and explain how to use these tools the right way because it is still possible, in fact, likely, that money can be made in stocks as long as they are used correctly.
Can You Make a lot of Money in Stocks?
Whether you want to make a lot of money tomorrow or in 50 years, the answer is a resounding yes! You can make a lot of money in stocks.
However, it’s important to point out that the effort involved and the likelihood of making a lot of money tomorrow is very different from making a lot of money in 50 years.
To make a lot of money tomorrow, you have to put up big sums of money in one stock and hope that you’re right. This does not usually go so well and results in huge losses more often than big wins.
You could also put up smaller sums of money in stocks over and over again as a day trader, but this is much harder to do.
Even with a lifetime of skills and knowledge, this is still incredibly difficult and does not guarantee you a lot of money.
How Can You Make Money in Stocks?
If you want to make a lot of money over a long period of time, then you’re in luck because that’s exactly what we’re going to talk about.
Statistically speaking, you have a better chance of enjoying big returns by investing for the long term rather than trying to make a lot of money as fast as possible.
The reason is compound interest, and it is the magic bean to your money-making beanstalk. There are all sorts of compound interest and retirement calculators out there, but here is a quick example.
If you begin with a $5,000 account and contribute $500 per month for 40 years, the total amount you will have contributed over that period is $240,000.
That seems impossible, but even a few hundred per month in contributions is helpful. Assuming you’re achieving the average real return of about 7% per year (after inflation and taxes), the magic of compound interest will theoretically have turned your $240,000 into about $1,400,000.
That’s over $1.16 MILLION you’ve made because of the magic of compound interest!
Another case for staying invested in the markets over a long time is that you benefit heavily simply by being around for all of the most profitable days in the trading year.
If you missed even 10 of the best days in a trading year, you would lose out on over 4% in returns on average each year.
How to Make Money in Stocks (Step-by-Step)
Step #1: Get a Brokerage Account
If you don’t have a particular preference, you mostly can’t go wrong with any of the top names in the business.
Simply go to the website and choose “open an account.” Once you’ve completed the process, you’ll be all set to deposit your money.
Step #2: Fund Your Account
To invest, it’s not a simple matter of clicking the buy button – you must first have money invested in your chosen brokerage account.
Many brokerages these days offer several different options for funding your account, though almost none of the brokerages out there allow you to fund it with a credit card, and rightfully so, in our opinion.
Step #3: Research Investment Opportunities
If you are interested in opening a brokerage account, you almost certainly have an idea of which stocks you’d like to invest in.
Whether it’s Apple, Amazon, Google, Tesla, or Microsoft, most of your top brokerage companies will give you the ability to trade with zero commissions, which is a relatively new development in the realm of stock trading.
An Exchange Traded Fund (ETF) is a mutual fund that is actively traded during trading hours like a stock to provide plenty of liquidity.
This would include the SPY (SPDR S&P 500) and other indexes, but companies like Vanguard and Fidelity have their own ETFs that are actively traded as well.
ETFs generally require far lower trading costs and management fees because they are pegged directly to indexes that are already actively managed and tracked.
Index funds are related to ETFs because they are created to closely mimic the performance of market indices such as the S&P500 and NASDAQ.
Mutual funds are generally the broadest type of fund because they can and often do include stocks, but they can also include bonds or other assets to achieve a specific investment goal.
Investment firms will often have their own managed mutual funds that allow investors to invest in several assets from stocks and bonds to international markets or real estate, all by adding a single mutual fund to their portfolios.
Retirement accounts are offered by almost every brokerage, especially the top names in the business.
While the Roth IRA is after-tax money, the Traditional IRA and 401k are both pre-tax and have separate requirements.
The tax advantages in a retirement account may be worth considering if you’re looking for ways to reduce your tax liabilities.
Step #4: Create a Game Plan
This is the most important step because it sets the stage for your long-term investing success.
Before making your first purchase in a brokerage account, it is critical to have a plan before blindly buying stocks.
We’ll get into defining your risk in a bit, but you should invest based on three things:
- Your age – are you close to retirement, or will it be decades until your done working? If you’re close to retirement, you may want to consider avoiding a stock-heavy portfolio that carries more risk.
- Your risk tolerance – if a pure-stock portfolio, and the big swings to your portfolio that come with it, keeps you up at night, you might need to consider adding less-risky assets.
- Your interest in managing your portfolio – if you want to keep your hand on which assets you invest in, old-fashioned firms will keep your options open, but there are robo-advisors as well that invest by algorithm purely based on your risk tolerance.
There are so many strategies out there that tell people how to invest. You can go for the old model of “your age in bonds,” which just takes the decision-making stress.
However, you need to know what your goals are.
Warren Buffett advises most people that the only thing they ever need to invest in is a total market index, which most big investment firms offer.
These total market index funds are typically all stock funds, so make sure you create a plan that fits with your investing personality and risk appetite.
>> More: How to Research Stocks
Step #5: Become a Long-Term Investor
Once you’ve opened a brokerage account, funded this account, researched your options, and come up with a game plan, all you need to do is execute it.
Remember that once you’re invested in the market, you’re going to start seeing the fluctuations in your account.
Don’t let this deter you – you may dip a bit negatively the day you start investing, but ups and downs are to be expected.
Over time, you will see positive growth when you start receiving dividends, interest, and stock growth, especially as it gets compounded over many years.
Tips to Make Money in Stocks
#1. Invest Regularly
Start with a small contribution that you can regularly contribute without it affecting your budget too much.
After some time, feel free to adjust this number, but make sure to keep it either the same or more for as long as possible.
Another good rule of thumb is to invest as you get paid.
This simple habit will help you get to your desired nest egg while benefiting from compounding interest over time.
#2. Set Up Automatic Contributions
Just to make things easier, many brokerages offer automatic deposits so that you don’t have to worry about forgetting.
This will also help you arrive at a budget-friendly deposit amount.
#3. Do Not Try to Time the Market
Timing the market is nearly impossible. You’ve heard people said something along the lines of, “If I’d only bought at the bottom….”
Very few people did. Buying in and selling out of your portfolio with regular success is very difficult, even if you have specific tools and experience. The best thing you can do is simply buy and hold.
#4. Diversify Your Investments
Total market indexes typically are all stocks, so you may want to consider looking to modern portfolio theory as well if you’re a bit more risk-averse.
This theory says that the best way to minimize risk while maximizing returns is to diversify across many asset classes (i.e., stocks, bonds, commodities, real estate, etc.).
While it doesn’t get into many specifics about exactly how much you should diversify, diversifying your portfolio will give you the best way to capture returns in several asset classes because you can’t know which one may experience difficulties.
#5. Consider Professional Help
Not only that, but an advisor will also be an excellent support structure when things get dicey in the markets.
If you tend to sell when the markets crash, a good advisor will be there to help talk you out of making fear-based decisions and potentially locking in losses by selling positions you should keep.
>> More:Best Robo-Advisors
#6. Know Your Risk Tolerance
We’ve mentioned risk a bit, but this tip is important. Risk is the amount of money you stand to lose if your investment moves against you.
If you can stand to experience more swings to your portfolio, more risk may, over the long term, result in higher profit potential.
If you’re more risk-averse, you may experience less variance in your portfolio balance and sleep a bit better, but you may also limit your profit potential.
Bottom Line: How to Make Money in Stocks
The stock market has been rising almost every year since its inception. As long as you set up a portfolio with a game plan in mind and stick to the plan, stocks can be a powerful tool to help you realize profits over time.
If, on the other hand, you want to make a lot of money overnight, stocks might not be your best option.
Opening an account and funding it to get started is excruciatingly easy these days, but the most important step is to follow your game plan.
If coming up with a game plan is a bit overwhelming, there’s nothing wrong with hiring a financial advisor to help you through that process.
There’s plenty of money to be made in stocks, but the only way to do it is to educate yourself and then start investing.