Making money from the stock market has historically been one of the easier ways to build wealth for many Americans. Investors don’t need large sums of cash to get started, and the opportunities to generate profits are huge.
Yet many new investors tend to focus only on the idea of share trading. The belief seems to be that they only need to pick the right stock, wait for the share prices to go up, and then sell their stocks at a profit.
In reality, successful investors use a combination of strategies to build up a profitable portfolio that continues generating profits for years to come. Here are some tips for making more money from investing in stocks.
Trading vs. Investing
Picking the right stock and waiting for the prices to increase before selling it at a profit is commonly known as day trading. The objective is to locate stocks that have the potential to increase in price and then sell them quickly to realize the maximum profit from that single trade. The trader relies on real-time data to watch stock prices closely.
Day trading can sometimes be a way for some people to generate cash, but in reality, it’s still a form of speculation. It’s not technically investing.
By comparison, a savvy stock trader will choose a solid stock in a company that’s performing well and buy wisely with the intention of holding that stock over the long term. The share prices may fluctuate on a daily basis, but over the long term, those prices should steadily increase.
Before you jump into the share market, take the time to work out which strategy works better for your long-term financial goals. Trading can sometimes be a good way to build up investing capital quickly while investing for the long-term offers several opportunities to build wealth within your share portfolio.
Choosing the Right Stocks
Many investors choose to watch the fluctuations in the stock market for hours each day, staring at computer screens and waiting for changes. However, savvy investors choose stocks based on their likelihood of long-term growth and stability, so daily movements in price don’t concern them overly much. If your intention is to buy and hold stocks over a period of time, choose companies with a solid track record of performance.
There are also various factors that can affect share prices, so it’s wise to pay attention to stories of new developments or discoveries or policy changes in whatever sector your stocks are within. For example, if you own stocks in a natural gas company and news reports announce a sudden fall in supply amounts as they relate to demand pressures, chances are stock prices in the energy sector may rise. The key to determining the right energy stock to add to your portfolio is to keep a close eye on market activity.
Many investors buy carefully chosen securities with the intention of holding them over the long term. The objective is to choose companies with strong prospects for growth into the future and solid management behind their operating decisions.
Over time, the value of those stocks should increase, representing a healthy amount of capital growth. The result is a share portfolio worth far more than the amount paid for the initial stocks.
(Maybe worth learning to be tax savvy with capital gains. Remember that tax evasion is wrong on many levels, optimizing your tax liability is the way to faster wealth growth.)
Investors who buy stocks with the intention of holding them over the long-term often pick shares from companies that pay dividends. Some companies choose to share their profits with shareholders in the term of dividend payments.
Some investors may choose to receive those dividends in the form of cash payments to supplement their incomes. Others prefer to receive their dividends in the form of additional shares added to their portfolios.
Dividend reinvestment plans allow you to expand your stock ownership in a company without paying brokerage fees. Some companies may also offer shareholders discounted prices on those shares, representing an opportunity to benefit from greater profits for the investor if those stocks are sold.
Choosing to hold stocks over the long term and reinvest the dividends as new stocks can also be a solid way to grow a portfolio without spending more of your own money.
Mitigate Risk and Reduce Losses
One of the keys to making money from stock investing is learning to mitigate risks and minimize any losses. Many share trading platforms offer the opportunity for traders to set automated safe-guards on their portfolios to help reduce the risk of losing too much money on a particular trade. For example, it’s possible to set a stop-loss control so that the shares are automatically sold if the price drops below a specified level set by the investor.
Making money with stocks remains a great way to build wealth. If you’re keen to make more money from stock investing, consider the benefits of combining a range of strategies that add to your total portfolio over time.
Editor’s note: Ruby Tomlinson shares her wisdom of the stock market. She started investing when she was 30 years old, and despite a blip here and there, hasn’t looked back. She now shares her tips and thoughts with others looking to get started, or already on the road.