Making money in the stock market is not as difficult as it appears especially when you have good knowledge of how it operates.
In this read, I’ll be giving you a guide on how you can make money in the Stock Market.
Majority of worlds richest people while having their own businesses, have made some of their billions trading in the stock market.
There is no doubt that there are many means of making money, but some ways trump others. While some money-making ventures would require you to have a long term investment, there are others that guarantee you would make money within a shorter period.
Knowing how to make money in the stock market sure looks enticing, as beautiful as it looks however, there are risks. But learning or understanding how to navigate through these risks makes your chances even better and definitely limits your losses.
Before we discuss the various means of making money in the stock market, let’s understand what the stock market means and what stocks really are.
Table of Contents Hide
- What Is Stock Market?
- What Is A Stock?
- What Risks Are In Trading In The Stock Market?
- How To Make Money In The Stock Market
- How Can I Limit The Risks In Buying Stocks?
- Control Your Emotions
What Is Stock Market?
The stock market refers to public markets that exist for issuing, buying, and selling stocks that trade on a stock exchange or over-the-counter. Stocks, also known as equities, represent fractional ownership in a company, and a stock market is a place where investors can buy and sell ownership of such investible assets.
An efficiently functioning stock market is considered critical to economic development, as it gives companies the ability to quickly access capital from the public.
What Is A Stock?
A stock represents a stake in a company. Owning a share means you have a stake in the company and can make claims to its earnings and assets. However, you can only make claims to the tone of your investment capital.
Even though you have a stake in the company, having an insignificant share means you don’t get to decide on how the company is run. You would most probably just watch from the sidelines and take dividends.
However, the structure of the company and its ownership is where the stocks’ value lies. If stockholders didn’t have a claim on earnings, then stock certificates would be worth only the paper they’re printed on.
What Risks Are In Trading In The Stock Market?
Buying stocks like every business investment that promises financial gains has its risks. Stocks carry a much greater risk of short-term losses than bonds or cash (the other two major asset classes).
Since World War II, Wall Street has endured six bear markets. (A bear market is when the market sustains a decline of over 20% in the value of the S&P 500). As a result, it’s generally not a good idea to invest a sizeable chunk of money in stocks if you’ll need to spend the money within five years or so.
Primarily, the risk of investing in shares is that it can result in a loss of capital. This could be because of a series of events that are not in your control. Also, negative developments in the company can affect its shares.
It is therefore important as an investor to remember sometimes things can go “south”.
Invest wisely, better to be wary than sorry.
How To Make Money In The Stock Market
There are so many ways to make money, trading in the stock market is one of them. If you have ever wondered how to make money in the stock market or what securities to trade on this will be a nice read:
Buy Growth Stock
These stocks are from companies expected to experience vigorous growth. One of the major ways traders can make money with them is holding their shares until they increase in price and then selling them to make a profit.
The gain made in growth stock is known as a capital gain. Sometimes, share prices will fluctuate wildly in volatile markets, offering traders opportunities to buy, sell, and take profits quickly.
When this kind of stock starts generating a substantial and sustainable positive cash flow, and its revenues and earnings are expected to increase at a faster rate than the average company within the same industry, the owner (s) of such stock are advised to sell in order to rake in profits.
Young companies typically have some sort of advantage (a new product, a breakthrough patent, overseas expansion) that can make the difference that you need. This does not mean that older companies in the game can’t do the same thing. Because they too can develop something new, or make a major breakthrough.
Growth stocks usually pay smaller dividends, as the company typically reinvests retained earnings in capital projects.
Monitor and buy IPOs
When organizations wish to make their shares available for the public to buy, they hold an IPO (initial public offerings). This is a way of giving members of the public right to purchase.
For companies that have been estimated to grow in a short period of time, their IPOs are closely monitored. Such companies tend to witness a heavy trade within a short period of going public.
This is because stock prices from promising new companies can be bid up quickly to high levels in a short period of time. This presents opportunities for quick and sometimes lofty profits.
As an individual looking to make extra cash, learning how to swim the muddy waters of the stock market and making money while at it would no doubt be amazing.
To be able to start this you need to learn How to Invest: A Beginner’s Guide to Investing in the Stock Market.
Buy Value Stocks
A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.
These stocks are usually undervalued by the market and this is why it is a good bargain for buyers. Value investing requires a thorough analysis of a company’s financial statements to understand its financial standings and future potential.
The analysis required might seem cumbersome, but it is totally worth it when it yields profits.
Warren Buffett was known to have engaged in value investing. And made a fortune seeking out undervalued stocks over a period of several years.
Traders can make money by holding mutual funds or exchange-traded funds on stocks. A fund is made up of a group of financial assets, often stocks, that are bundled together as a single security. Mutual funds often require minimum purchase amounts and are not traded during market hours.
Exchange-traded funds however similar to mutual funds are not mutual funds. These funds are traded during market hours as if they were individual stocks. They can also be bought and sold in smaller increments than mutual funds.
Both mutual funds and exchange-traded funds that hold stocks often pay out dividends from their holdings regularly.
An income stock is an equity security that pays regularly, often steadily increasing dividends. Income stocks usually offer a high yield that may generate the majority of the security’s overall returns.
Owning income stocks is a traditional way to make money in the stock market. These Stocks are from companies that earn solid revenues. And they pay dividends to stockholders usually quarterly.
Income stocks can frequently make money for their owners. However, traders may often have to accumulate large amounts of such stocks to receive significant dividend payments.
This stock is usually found in the real estate industry, energy sector, utility sector, and financial institutions.
Short-selling a stock is another common way of making money with stocks. While traders often think of buying, or going “long,” on stocks they think will rise in value as a way to gain money, short-selling takes the opposite approach.
Short-sellers borrow shares, usually from their broker, in order to sell, or “short,” stocks they think will fall in value. After the shares fall in price, they buy them back and return them to the lender. They pocket the difference in the price at which they sold the shares and the lower price at which they bought them back.
How Can I Limit The Risks In Buying Stocks?
Diversify your investments.
As a young investor do not make the mistake of hedging your investments in one sector of the economy. You can invest in real estate and also invest in Tech companies, or energy companies.
The idea is that it’s most unlikely that these sectors might experience losses at the same time. So when your investment portfolio is not all in “one basket”, it helps limit the number of losses you can suffer as an investor.
Have A Long Term Outlook.
Market fluctuates regularly and its direction, most time cannot be predicted. As investor holding a stock for a longer period will help you predict a lot better, the directions it might take. Knowing this helps know when it is best to sell and take in profits.
Control Your Emotions
As an investor, you must be disciplined. The ability to have a strategy and plan that you follow through with will definitely distinguish you from the crowd. Do not always go with the crowd or let the news reports spook you into cashing in too early.
Let your investment decisions be void of emotions.
As much as there is risk in the stock market, there are also benefits to learning how to make money in the stock market. We will be doing a great deal of disservice if we do not outline some of these.
Below are some of the benefits of knowing how to make money in the stock market.
Shares have the ability to outperform most investment vehicles, especially when held for a longer term. Due to market fluctuations, shares can go up or down, one can cash out big if they recognize the right opportunity and swoop in.
Many stock pay income:
Apart from buying or selling shares for the aim of making profits, owning shares in big corporations can earn you dividends. These corporations usually have an established income profile.
Easier to liquidate:
Unlike all other investment vehicles, it’s a lot easier to buy or sell shares or stocks in the stock market. One can easily do that or need do is have access to the internet.
They Allow for greater diversification:
The stock market gives an investor a range of things to invest in. Having a diversified investment portfolio helps put a check on your losses. If you have shared only in properties, and there is a decline in the real estate market, there would be a decline also in your investments.
But when you diversify, your investments are collectively safer.
Sometimes the only thing holding us back from making extra cash is not knowing quite how to go about it. The stock market is right there for anyone looking for such an opportunity.
We hope this article helped you identify these means. And that now you are ready and willing to take your first steps, that’s if you are not investing already.