When you hear people talking about the stock market, it’s often about how they either hit the jackpot or lose everything – never both but always either.
But perhaps one thing keeps you puzzled: With the S&P 500 giving annual returns of more than 5%, how come people still lose money? It’s because they don’t know how to make money off stocks!
Ask anyone with good financial knowledge and they would tell you that stocks are the way to getting wealthy. It doesn’t require much time or is as complicated as you think; thus, making stock investing one of the best ways to build wealth.
History has proven that the stock market would go up over time, and as long as you stick to a set of rules and methods when buying stocks, you can make a profit.
Nope, it doesn’t involve you sitting in front of the computer all day looking at price movements.
The only way to learn how to make money off stocks is by understanding how they work and finding the right strategy that works best for you and your goals.
How stocks work
When you do something without understanding how it really works, you would, most of the time, fail. Hence, the first step is to know what stocks are.
Did you know that stocks are also businesses? When you buy a stock, you are buying a part of a company. This would mean that the more shares you own, the more influence you would have in the business. Hence, if its value increases, so would its share price.
By owning a stock, you can profit in a variety of ways. For example, if a company that you invested in is doing well, it could choose to give a portion of its profits to shareholders in the form of dividend payments. You could also choose to sell off the stock at a profit or continue to hold it if you believe that its share price will continue to increase.
All this calls for having a strategy. We'll discuss three strategies on how you can make money off stocks.
1. Buy and hold stocks
Most may consider this the easiest and best strategy as it is straightforward and most effective. Because no one can time the market, it is better to buy good companies for a low price and wait until the share price increase.
Historically, the stock market only moves one way – upwards (and yes, especially after a crisis)! This is especially true for companies with strong fundamentals. Because a company has strong fundamentals, it is less likely to underperform in the long term, allowing you to always profit off the stock.
However, you might say, ‘But can’t we just buy and sell stocks within a short period once we see a price increase?’
No one can predict what will happen to the market in the long term. Yes, you may be able to make a small profit. However, there will be some instances when the market would move against you, thereby, causing you to lose money. When you consider the profits and losses of all your trades, who can say if you would be profiting overall?
As such, it’s a no-brainer to invest for the long term. No one can predict how the market will perform in the short term; therefore, it is better to stay invested than sacrifice guaranteed profits for potential short-term gains.
2. Reinvest your dividends
Some companies, including $Apple(AAPL)$, would periodically pay shareholders dividends.
“Oh wow, extra money to spend on food and clothes,” you might think. Sorry, but we don’t think so! Why spend the dividends on things that do not make money for you?
Instead of spending your dividend income on useless items, consider reinvesting it back into stocks. Although you may not be making much in the short term, do not underestimate the power of compounding. As time passes, your total investment would be worth much more if you invested all your dividends, too.
However, there are situations when reinvesting your dividends may not be a good idea. For example, if the company you are invested in is not doing well financially, you should consider reinvesting your dividend income in another company.
Reinvesting your dividend income should always take priority. It is inexpensive, easy, and doesn’t take much of your time.
Reinvesting your dividend income would also ensure that your investments can grow at a much faster pace, without having to spend a single cent. It isn’t always the right choice in some situations, but we will leave that decision up to you.
3. Buy ETFs
As you already know, betting everything on one stock is never a great idea. The same goes for stocks as we can never predict which company would do well. Most of us would buy multiple individual stocks and think that is what diversification means.
But why take such a roundabout and troublesome way when we can just buy ETFs or exchange-traded funds?
ETF is a type of fund that consists of many different types of stock. For example, you want to buy Apple, $Alphabet(GOOG)$, $Microsoft(MSFT)$, and $Amazon.com(AMZN)$. By buying an ETF of the S&P 500 (for instance, SPY ETF), which consists of these aforementioned stocks as well as the other best stocks in the market, you can have a share of the top-performing companies in the world.
Easy, right? It doesn’t require many funds nor attention.
You can diversify in many ways but investing in a mutual fund or ETF is one of the best and cheapest ways to diversify your portfolio.
But we hope you’ve learnt one thing from the above strategies: You don't have to spend all your time researching which stocks will rise or fall in the short term if you want to make money off stocks.
Even the most successful investors advise us to invest for the long term and keep the money for years or decades until we need it.
Follow @VI College for more stock-related articles!
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Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. Please do your own due diligence.
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