4 Ways To Make Money In Stocks – The New York Stock Exchange (NYSE) was created on May 17, 1792, when 24 stockbrokers and merchants signed an agreement under a buttonwood tree at 68 Wall Street.
How to make money in stocks:
If you’re looking to make money in stocks, there are a few things you need to know. Here’s how to get started.
1. Open an investment account:
All the advice about investing in stocks for beginners doesn’t do you much good if you don’t have any way to actually buy stocks. To do this, you’ll need a specialized type of account called a brokerage account.
These accounts are offered by companies such as E*Trade, Charles Schwab, and many others, as well as by newer app-based platforms like Robinhood and SoFi. Opening a brokerage account is typically a quick and painless process that takes only minutes. You can easily fund your brokerage account via an electronic funds transfer, by mailing a check, or by wiring money. Or, if you have an existing brokerage account or a 401(k) or similar retirement account from an old employer, you may be able to transfer these into your new brokerage account.
2. Making Money in Stocks: The Buy-and-Hold Strategy
There’s a common saying among long-term investors: “Time in the market beats timing the market.”
What does that mean? In short, one common way to make money in stocks is by adopting a buy-and-hold strategy, where you hold stocks or other securities for a long time instead of engaging in frequent buying and selling (a.k.a. trading).
That’s important because investors who consistently trade in and out of the market on a daily, weekly or monthly basis tend to miss out on opportunities for strong annual returns. Don’t believe it?
Consider this: The stock market returned 9.9% annually to those who remained fully invested during the 15 years through 2017, according to Putnam Investments. But, if you went in and out of the market, you jeopardized your chances of seeing those returns.
- For investors who missed just the 10 best days in that period, their annual return was only 5%.
- The annual return was just 2% for those who missed the 20 best days.
- Missing the 30 best days actually resulted in an average loss of -0.4% annually.
Clearly, being out of the market on its best days translates to vastly lower returns. While it might seem like the easy solution is simply to always make sure you’re invested on those days, it’s impossible to predict when they will be, and days of strong performance sometimes follow days of large dips.
3. Consider index funds:
If you want to make money in stocks, there is an easier way to do it than buying a bunch of individual stocks. Index funds are made up of dozens or even hundreds of stocks that mirror a market index such as the S&P 500, so you don’t need much knowledge about the individual companies to succeed.
With index funds, you’re investing in lots of stocks all at once, and you don’t have to manage them individually. Investing through funds can help decrease your risk: If you are invested in three companies and one goes out of business, it will probably hit your portfolio pretty hard. If you’re invested in 500 companies and one goes out of business, it probably won’t affect you as much.
Yes, it’s possible to earn higher returns with individual stocks than in an index fund, but you’ll need to put some sweat into researching companies to earn those returns, and the likelihood that you’ll actually lose money is higher.
4. Reinvest Your Dividends:
Many businesses pay their shareholders a dividend—a periodic payment based on their earnings.
While the small amounts you get paid in dividends may seem negligible, especially when you first start investing, they’re responsible for a large portion of the stock market’s historic growth. From September 1921 through September 2021, the S&P 500 saw average annual returns of 6.7%. When dividends were reinvested, however, that percentage jumped to almost 11%! That’s because each dividend you reinvest buys you more shares, which helps your earnings compound even faster.
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That enhanced compounding is why many financial advisors recommend long-term investors reinvest their dividends rather than spending them when they receive the payments. Most brokerage companies give you the option to reinvest your dividend automatically by signing up for a dividend reinvestment program, or DRIP.
The Bottom Line:
The tried-and-true key to successful investing, then, is unfortunately a little boring. Simply have patience that diversified investments, like index funds, will pay off over the long term, instead of chasing the latest hot stock.