The stock market returns an average annual return of 10%; way more than you could find in bonds or a savings account. If you’re looking to learn how to make money in stocks, the answer is simple. Investing for the long term, diversifying your portfolio, and setting up a schedule to invest is a sure-fire way to become a millionaire by retirement.
So how do you do it? Follow our guide for how to make money in stocks in a simple and stress-free way.
How Do You Make Money In Stocks?
There are so many excuses that stop us from investing. However, the biggest explanation of all is that people don’t understand the stock market or how to invest. The stock market is the only type of market where the price of goods goes down, and everyone is too scared to buy. To get over your stock market fears, we’ve come up with a simple guide to teach you how to make money in stocks.
Follow along to maximize your retirement or savings accounts:
Invest For The Long Term
Investing in stocks is a long-term game. Instead of focusing on the fluctuating value of your stocks, remember that if you invest for long enough, you will almost always win. The amount that your stock increases or decreases over the year are only part of the value you’ll get. Also, remember if you’re investing in dividend stocks, you’ll receive a percentage of the company’s profits each year.
When you invest in the long term, you’re able to look at the big picture, which is your total return. You won’t buy and sell stock frantically when the price goes up or down within a particular company. If you plan to hold your stock for at least five years, let the magic of the stock market happen on its own.
Many people have become millionaires by investing a couple of thousand dollars early in their lives and sitting on it for 25-30 years. By keeping your investments and funding for the long term, you’re increasing your chances to win in the end.
All these long term successes are due to compound interest. For example, if you invest $1,000 into a retirement account with plans to work for the next 50 years, you would have $18,000 by the time you retire even if you invested nothing else into that account. If you’re investing with the long term game in mind, you’ll be shocked at how much your money can grow.
Diversify Your Portfolio
Maintaining a diverse portfolio is one of the best ways to mitigate your risk when investing in the stock market. Some people will invest all of their money into one company, only for that company to fall years later and for all of their money to be lost. Instead of spending all of your money into Apple, or Nike, invest in a diverse blend of Fortune 500 companies to protect you from losing all your assets.
By investing in many large companies, you’ll be more prepared when the stock market falls hit the companies in your portfolio. It’s unlikely that all industries and all companies will be impacted by the same problems. So don’t just invest in technology; invest in healthcare, aerospace, food companies, and whatever other industries you can think of.
If you’re intimidated by the thought of coming up with what companies to add to your portfolio, worry not. There are many types of stocks you can buy that will cover a wide range of Fortune 500 or other large companies. This way, you don’t have to pick the companies yourself, and you’re maintaining a diverse portfolio.
Know The Risks
The biggest risk with investing in the stock market is that your investment fluctuates much more than an investment in a savings account or in real estate would. However, despite this risk, the stock market makes far more people into millionaires that real estate investing or other types of investing do.
If you’re planning to invest in the stock market and trade, you’ll need to understand the risks of doing so. Remember that stocks you keep longer have lower tax rates, and typically have a higher return.
If you are someone who enjoys trading and taking risks, be sure to do so with caution. Making the wrong move can sometimes drain your entire portfolio.
Know The Difference Between Mutual Funds And Index Funds
One of the main reasons people are hesitant to invest is that they don’t know how to do it. There are so many different types of stocks out there, and it can be overwhelming to figure out which one is the best for you. To make things a little less intimidating, we’re going to go over the main types of stock you can buy if you’re thinking about investing.
Mutual Funds: Mutual funds are investments that pool money from different investors and invests in a wide range of stocks and bonds. Mutual funds are actively managed by brokers or fund managers who make their money off of shareholder fees.
Mutual funds are diversified, which lessens the risk of investing in only one type of stock. If you’re investing in a mutual fund, you can pick whether you’d like high risk, low risk, or medium-risk investments. Just remember that the lower the risk, the lower the chance is for a high return.
Index Funds: Index funds are a type of mutual fund that is not actively managed by fund managers. The best part about index funds is that you don’t have to pay a fee to manage your funds, which is usually between 1%-3%. While this percent may sound minuscule, it does add up. The difference could be tens of thousands of dollars over a long enough period.
Like mutual funds, index funds allow the investor to buy into significant global Fortune 500 companies without having to invest in each company individually. This is a great way to set up a diverse portfolio for a meaningful long-term gain.
Set Up A Schedule To Invest
Time is a critical factor when investing in stocks. It’s important to invest early on in your career. Even if you make a large investment early in your life, it can only appreciate so much in value over the decades. This is why continuing to invest regularly is such an important part of saving for retirement, or whatever it is you’re saving for.
If you are able to save a modest $200 every month, you can become a millionaire in 48 years from compound interest. If you save $400 a month, you’ll become a millionaire in 39 years. Going $200 to $400 shaves off a year from the time you’ll become a millionaire. For young people, this means if you’re 25 and start your $400 investment now, you’ll be a millionaire just in time for retirement.
Invest as much of your money as you can afford to each money. If you can invest $2500 every month, you’ll be a millionaire in only 17 years. The magic of compound interest will make you rich, but only if you take the initiative to invest every month.
Invest It, Then Forget About It
For investing in the long term, don’t check your stocks too regularly. Looking at the stock market rises and falls will only fool you into thinking you’re going to lose all of your money. In reality, the stock market is a long game, and everything evens out in the end.
If you’re continually trading stock after owning it for a short time, you’re preceding the tax benefits that owning a stock for the long term has. If you sell your stock before owning it for an entire year, you’ll pay a much higher tax rate than you would if you just held onto it.
While there are a few situations that call for making changes to your portfolio, most of the time, the stock market will correct itself. Even during recessions and major market crashes, the market has an upward performance in the long run.
Whether you’re investing in individual stocks, index funds, or mutual funds, you’ll find the best return when you put your money away for the long term, develop a diverse portfolio, and set up a schedule to invest your money.
While the stock market may seem like an intimidating field to enter, we promise the best time to get in is now. The longer you wait, the more money you’ll forfeit in the long run. We’re confident that if you follow our guide on how to make money in stocks, you’ll be a millionaire by the time your retirement rolls around.