How to Make Money Trading Stocks
We write a lot about money here at Investment U. After all, we want every single one of our readers to achieve financial freedom. And one of the greatest wealth-building machines humanity has ever seen is the stock market. Despite this, many Americans still have no idea how to make money trading stocks.
By the end of this article, though, you’re going to know exactly how to get started… and have a firm grasp on how so many folks make a living and supplement their income via the stock market.
Starting an investment portfolio can be a daunting task. But you don’t need to be a genius or “lucky” to start making money in the stock market. Anyone with a few extra bucks to invest can get started on their lunch break. And it all starts with just a few easy steps.
The quickest (and probably easiest) step is picking and setting up a brokerage account. Now, there are lots to choose from, but it’s worth mentioning that they all do roughly the same thing. Vanguard, E-Trade, Charles Schwab, Fidelity and Robinhood all offer investors the ability to invest commission-free. This means you won’t have to pay any extra fees to trade on the stock market.
If you’re still not sure which option is right for you, we’ve put together a list of the top 10 investment apps for investors to check out.
Once your account is set up and you’ve transferred some money into it, you’re ready to start investing. You can pick up some penny stocks, head to the promised land of the most expensive stocks or begin with a foundation of blue chip stocks. But this is where it can get a little complicated.
Practice Makes Perfect
Before you start choosing which stocks to invest in, you’re going to want to do your research. Not all stocks are created equal. And not all of them are going to offer the same return on investment. Picking a stock is an art form. And some art appreciates… while other art might not appreciate at all. Figuring out the difference is crucial to learning how to make money trading stocks.
So before you get started, it’s a good idea to give your strategy a practice run. Anyone trying to figure out how to make money trading stocks will be doing themselves a big favor by playing with fake money instead of their own hard-earned cash. And that’s never been easier thanks to all of the stock-trading simulators out there.
Stock simulators are just what they sound like. They’re a way to test an investment strategy in real time while following the actual movement of the stock market… without spending any real money.
It’s kind of like how software developers beta-test products before releasing them to the public. This helps the developers find bugs or kinks in their products before releasing them to the general public. And when it comes to investing, it can pay dividends to test a strategy before diving into the real thing.
Figure Out What You Want From an Investment
Stock investing isn’t just about picking stocks and making money. There are a lot of other factors to consider… like what your risk tolerance is and what kind of time horizon you’re looking at.
To show you what we mean, let’s take a look at two different investors…
The first is Ben.
He’s 55 and makes a respectable $75,000 a year. For the past 20 years, his investment strategy has primarily been socking money into his 401(k). His portfolio has grown 5% annually – so he’s doing better than the average American, but only slightly.
Ben wants to retire at 65 with $1 million in assets at his disposal. Currently, he’s got $175,000 at his disposal to invest with. Because his time horizon is short, Ben needs to be pretty aggressive if he wants to hit his goal. This will require taking on a fair amount of risk in order to hit the 19.4% annualized return he needs to get there. And considering that the annualized return of the S&P 500 is around 9.8%, he’s going to have to get creative.
Ben would have to maintain a slightly smaller allocation of blue chip stocks in his portfolio and concentrate a larger amount of his investment in short-term and ultra-short-term trading. This might involve an increased focus on insider trading (of the legal variety) or on trying to track down growth stocks. Or it could involve an emphasis on playing off the natural swings in the market via cyclical stocks to lock in regular short-term gains that add up over time. Ben may also decide to enter the world of options investing.
But it’s always important to remember to maintain a diversified portfolio. And that doesn’t mean investing in several different tech stocks. Stocks in the same sector tend to ebb and flow in unison. So if the tech sector takes a hit, a diversified portfolio can be buoyed by investments in the materials or energy sectors.
By diversifying his portfolio and focusing on short-term investments, Ben will increase the likelihood of hitting his goal safely.
The next investor is Nicole.
Nicole’s a bit younger. At 40, she makes $70,000 a year and has a nest egg of $25,000 to invest with. Like Ben, she also wants to retire at 65 with $1 million in investable assets. Even though she’s got a lot less money to start with, she doesn’t need to take on as much risk with her investments. That’s because she’s got a longer time horizon.
If she invests a mere 5% of her annual income, Nicole needs to see an annual return of only 14% to turn her initial $25,000 investment into $1 million by the time she retires. This means she doesn’t need to take on the risk of investing in many short-term investment strategies. Instead she can concentrate the brunt of her portfolio in blue chip stocks and just check in every once in a while to make sure things are going as they should.
Blue chip stocks are an excellent long-term investment for several reasons.
- They’re among the safest stocks out there.
- If they don’t perform well, it’s easy to find out, because they get kicked from the Dow.
- Many of them also pay dividends.
So because Nicole has a longer time horizon, she can simply pick out a few blue chips – preferably ones that are dividend aristocrats – and watch her money grow. The stocks themselves promise steady long-term growth. And the dividends will provide a form of passive income.
And as those dividends begin pouring in, if Nicole’s smart, she’ll use what’s called a dividend reinvestment program (DRIP). This is a great way boost the number of shares she owns while naturally increasing future dividend payouts.
All she needs to do is let her brokerage know that she’d like to activate a DRIP, and her dividend will be reinvested in dividend-paying stocks. Each and every new share bought will also pay its own dividend. Over the course of a couple of decades, this can amount to a serious boost in Nicole’s retirement account. And it’s an almost-surefire way to make money trading stocks.
Now That You Know How to Make Money Trading Stocks…
Honestly, the examples above are just a starting point. If you’d like to learn other investing strategies, we highly recommend signing up for our free e-letter. Whether you’re new or already an experienced investor, you’ll find useful tips and research from market experts. They cover a wide range of investing topics.
Combining various strategies within a diversified portfolio is one of the greatest ways to increase your wealth and ensure you have enough money to retire. And if you do it right, you might just get to retirement sooner than you think.
Read Next: The Five Best Stock Trading Courses for Learning at Home
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.