Through the years the stock market has allured many who want to make a quick buck. However, making money investing in stocks is a journey and not a destination.
Warren Buffet is a case in point; he has been investing since the age of 12 and has held stocks for decades. His company though, Berkshire Hathaway, is staring at a cash balance of $100 billion and no place to invest.
As a small investor, we (unfortunately) do not face any issue due to the size of our portfolio. To make money from investing, though, requires both patience and constant attention. You need to ensure that you are following the best practices and have a common-sense approach to stock markets.
Below you have 11 ways you can make money investing in stocks.
1. Growth Stock Investing
Growth stocks are the companies that focus more on the rapid growth of operations rather than rewarding investors through dividends. The investor’s returns come from a rise in the stock price. These are fast-growing, higher-risk companies and offer an opportunity for multi-bagger returns, but comes with a risk of failure (and possibly bankruptcy).
Currently, investing in growth stocks is one of the most sought after strategies by investors to help make money investing in stocks. Tech stocks, in particular, usually fall in the category.
2. Dollar-Cost Averaging Technique
The dollar-cost averaging technique involves spreading out stock purchases over a time-period and buying at regular intervals. The investor then buys stocks over a period of time, instead of using all of the money at once. With this strategy, the investor can buy more stocks at lower prices rather than when they are at their highest.
Though the technique doesn’t promise a shield against losses fully, it does help the investor to spread his or her money over time smartly. It’s a conservative approach to make money investing, and it reduces the chance that he or she would bet all the money right at the peak.
3. Value Investing
"The real money in investing will have to be made – as most of it has been in the past – not out of buying and selling, but out of owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value,” noted by the father of value investing Benjamin Graham.
That quote remains the mantra for many stock gurus. Graham believed in the concept of “buying and holding.” A smart investor will make money investing in stocks when he or she buys from the public that is selling in a panic.
Value investors usually look for stocks that are valued less than their intrinsic value. Basically, what that means is the stock is undervalued. You usually find this due to regular fluctuation in stock prices, as the market is susceptible to good and bad news
Because of this, stocks can trade at less than their fair value, which then the value investor swoops in to take advantage of.
The challenge, though, is that even with the same information, two investors might end up with different intrinsic values. Now you have the concept of “margin of safety,” that needs to be channeled. This means that investors should buy stocks at big enough discounts that allow them room for error in estimation.
Also, value investing is a subjective matter as some investors only consider existing assets and earnings, while others might weigh strategies considering future growth and cash flows as well. Despite different approaches, the bottom line for value investing remains that you spend less than the current actual price for the stocks. To read more, click here.
4. Top-Down Investing And Bottom-Up Investing
Top-down investing involves considering assets while looking at the bigger picture. The investor first evaluates the macro picture of the economy to select individual investments. The process usually starts with considering a macro-economic factor and then assessing how it will impact different commercial sectors.
When a favorable commercial sector is selected, then the investors distills the companies comprising the sector. The stock that is considered the most likely to benefit from the underlying macro-economic factor is chosen for investment. George Soros is one of the most famous practitioners of top-down macro investing.
The bottom-up investing is a study in contrast to the macro approach. The process here starts with analyzing the individual company’s fundamentals, following the hierarchy and reaching the macro picture in the end.
Both of these methods have pros and cons when it comes to wanting to make money investing in stocks. However, evaluating both company’s fundamentals and macro factors will hold you in good spot to make money in the stock market.
5. Fundamental Analysis And Technical Analysis
Fundamental analysis approach involves determining the health and performance of the company by looking at their economic indicators and key numbers to identify fundamentally strong and weak companies. To read more about this approach, click here.
Technical analysis involves basing investment decisions on previous trading patterns of the stock by considering its past price and volume trends. This helps investors to estimate the potential trajectory of the price.
Many investors use a combination of these two strategies to make money investing. They use fundamental investing to choose the stock and technical analysis for “timing” the buying and selling decisions.
6. Contrarian Investing
The contrarian investing approach supports going against the flow of the market. That is, when the market is on a high, and everyone is buying, the contrarian investor sells his or her stock. When the market hits bottom, while many are selling out, the contrarian invests his or her money.
Generally, the contrarian style of investing is aligned with the school of value-investing that encourages buying assets at undervalued rates according to some statistical measure. Here, the risk of going against the flow might require a lot of patience and mental toughness as the market can dominate fundamentals for years in the end.
Not giving in when everybody is making money isn’t an easy task.
Warren Buffet not investing in tech stocks in the 1990s is an excellent example of contrarian investing. His investment in GE and Goldman Sachs during the 2008-09 recession is another contrarian value-investing play that helped him really make money investing in stocks.
To read more, click here.
7. Dividend Investing
The dividend paying companies are mostly those that are financially healthy and generate a consistent cash-flow, thus giving out consistent dividends. For the most part, consistent dividend paying companies are stable with less volatile stock prices. One may refer to them as lower-risk companies in comparison to those companies that do not pay dividends.
8. Low Fees And Commissions: Avoid A Lot Of Activity
It may not be a “sexy” way to make money investing in stocks, but choosing your broker carefully and negotiating on your commissions and fees is a good way to enhance your returns. Your broker/financial advisor might not charge you anything, but he usually might be getting a payback from the brokerage/asset manager.
Analyzing the expense ratio of your funds/investments is critical. That 1% yearly commission compounded over a 3-decade period could be the difference between retiring in a mansion or a mortgaged home. Similarly, avoiding a lot of trading is also a net positive.
Filter out the noise and don’t give in to the daily gyrations of the market. Overactive trading will only make your broker richer.
9. Make Money Investing – Shift To A Saving Mindset
This is by far the easiest way to make money investing in stocks, but also probably the hardest. Invest more! Spending less and investing the surplus in the markets will guarantee that you will have more money in the end.
Although this sounds like common sense, it’s easy to get caught in the cycle of spending the additional money you got as a Christmas bonus rather than investing it.
Self-control and limiting your spending is tough, but it is the only 100% successful way of making more money in the stock markets. So your new goal should be:
You earn money and save it. What’s left you can spend it, compared to spending first and saving what is left.
We have always heard that you should never put all your eggs in one basket. Use this motto for your investment portfolio as well. Whatever the tip or analysis may be, betting all your money on one stock is too risky for any investor. A well-diversified portfolio is the key to long-term success.
A diversified stock market portfolio holding 10-12 stocks is considered ideal by experts to make money investing. However, if those 12 stocks are all consumer Internet companies, you are not really diversified.
11. Make Money Investing in Stocks Regularly
Very similar to point 9, you should regularly be investing in the market. If you are waiting for your new-year bonus or grandma’s birthday gift, you’ve already lost the battle. Regular investing instills a discipline necessary for financial success in the stock markets. It also helps in dollar cost averaging as discussed in point 2.
There are multiple automated apps and products which can invest directly from your paycheck. This will ensure you are not tempted to leave investing for the last.
The strategies to make money investing might differ from investor to investor. This list of strategies is not exhaustive, and are just a tip of the iceberg. Any form of investment involves a lot of research and risk-taking ability, irrespective of how rosy the picture looks.
It is critical to evaluate multiple investing models and apply them for different economic and personal scenarios to ensure a higher probability of success.