You can make money in the stock market. However, it is not as simple as some people might think. It is important to note that purchasing stocks is not a get-rich-quick scheme. Of course, some individuals have made a sizeable fortune from sudden and drastic surges in stock prices. Others have lost a portion of their wealth during market downturns.
The fact remains that investing in the stock market has notable risks and disadvantages. When done right, nevertheless, it can bring forth financial security. The stock market is still one of the best avenues to generate income, create wealth, and achieve financial freedom. How do you exactly make money in stocks?
3 Ways You Can Make Money in Stocks
1. Investing for Capital Appreciation
One of the ways you can make money in the stock market is by investing for the long haul. Note that stocks are assets. Buying a particular stock equates to partial ownership of an issuing company. Over time, if this company performs well, the value of the stocks you have purchased will increase. This is called capital appreciation.
Capital appreciation specifically represents the difference between the purchase price and the selling price of an investment. For example, if you invested $3,000.00 in Microsoft in January 2014, the value of your investment would be worth $30,000.00 in January 2022 since its stock price has appreciated from $30.00 to $300.00 during the entire period.
From the example above, it is important to highlight the fact that capital appreciation takes time. Maximizing capital appreciation requires passive investing or a buy-and-hold investment strategy. Most advisors and a lot of seasoned investors have advised that investing for the long haul is the most feasible path toward making money in the stock market.
2. Owning Dividend-Paying Stocks
There are two types of stocks based on rights and privileges: common stocks and preferred stocks. Common stocks represent residual claims while preferred stocks represent preference in profits. Note that preferred stocks can also be called dividend stocks because owning them gives investors the priority privilege to receive dividends.
In addition, the nature of preferred stocks also makes them an ideal investment option for generating a regular passive income stream similar to other fixed-income securities such as bonds and income-generating assets such as rental properties. These stocks also have the potential for capital appreciation though not as high as common stocks.
However, not all preferred stocks are created the same. Payouts are not 100 percent guaranteed. Some preferred stocks offer high dividend yields. Others have lower yields. It is essential for investors to first research the best dividend stocks in a particular market in terms of yields, as well as check the dividend history of issuing companies.
3. Trading or Active Investing Strategy
Some investors and traders have underscored the difference between investing and trading. For these people, investing is centered on a long-term buy-and-hold strategy while trading focuses on active or continuous and ongoing buying and selling activity. Nevertheless, trading shares the same definition as active investing strategy.
How do you exactly make money from buying and selling stocks? Reconsider Microsoft as an example. If you purchase its stocks when they trade at $300.00 per share and their price appreciates by $15.00 after a week or even by $1.00 within several hours, selling them would earn you a profit. Traders earn from the difference between the buy price and the selling price.
Stock trading is focused on earning small amounts of money on a more frequent basis. Furthermore, it involves purchasing and selling different stocks from different companies to take advantage of the regular movements in the stock market. The goal is to buy stocks when their prices are low and sell them when their prices appreciate.