How to Make Money in Stocks in 5 Steps

Stocks can offer huge returns to those who are willing to invest for the long term. But it is important for beginners to understand how the market works before they start investing.

It’s also a good idea to pay down high-interest debt before beginning to invest. Financial advisors generally recommend a “dollar-cost averaging” approach, where investors buy stocks in small increments each month or year to minimize risk.

Open an investment account

The first step in making money in stocks (or, for that matter, any investment) is opening an investment account. These accounts allow you to buy and sell securities like stocks or mutual funds through a brokerage firm. There are two kinds of investment accounts: a standard brokerage account and an individual retirement account (IRA). The kind you choose will depend on your goals for the money you invest.

Before you open an investment account, determine what type of investor you want to be and how hands-on or passive you want to be. You’ll also need to decide whether you want to select your own investments or let a professional manage them. Self-managed investment accounts are typically the most affordable, while professionally managed accounts often offer better returns.

Most financial advisors recommend staying invested for the long term and not trading frequently. This strategy is called the “buy and hold” approach. It’s based on the idea that the longer you stay in the stock market, the greater your opportunity for annual returns. Many investors don’t stay invested long enough or they trade in and out of the market too frequently, missing out on strong annual returns.

To maximize your investment potential, consider using an index fund instead of buying a basket of individual stocks. These funds track the performance of an entire market sector or industry and are often cheaper than individual stocks.

Pick stock funds instead of individual stocks

As a financial tool, stocks provide ordinary people the opportunity to invest in some of the world’s most successful businesses. They are a way for companies to raise money and give investors the chance to earn dividends or participate in stock buybacks. But picking individual stocks is a risky proposition. Unless you have the time and energy to follow the market every day, don’t mind paying brokerage fees, and have wisely allocated the rest of your portfolio to pad against big losses, it is much better to stick with low-fee index funds and ETFs rather than investing in individual stocks.

Many individuals fail to make a significant profit from individual stocks. This is true even of professionals. In fact, studies have found that more than 90% of large-cap professional fund managers fail to beat the market after five years.

Stock selection is a process that involves both fundamental and technical analysis. Both are useful for long-term trades, but each has its own strengths and weaknesses. Fundamental analysis focuses on understanding the business’s operating model, as well as the industry and economy. It also looks at a company’s growth potential and its current valuation in relation to its past performance.

A common mistake when picking individual stocks is jumping in too soon. It’s easy to be swayed by hot stock tips, but they are often given just at the peak of a stock’s performance. It’s better to adopt the “buy and hold” strategy and remain invested for the long term.

Stay invested with the “buy and hold” strategy

Buy and hold is a strategy that encourages you to stay invested in your stocks long-term, regardless of short-term market fluctuations. It’s the approach recommended by Benjamin Graham, one of the most influential investors of all time and mentor to Warren Buffett. Graham believed that stock selection was nearly impossible to do well at and that irrational price fluctuations were often caused by speculation. He advised investors to stick with a broad index fund and let compounding work for them.

The benefits of this approach include the ability to ride out temporary market downturns and take advantage of the power of compounding. By continually reinvesting dividends, your returns can grow significantly over the years. This can help you reach your investing goals faster than if you were to frequently trade in and out of the stock market.

However, staying invested with the “buy and hold” strategy can be difficult if you’re prone to making emotional decisions. Fear of loss may lead you to sell your investments when they drop in value, or it could cause you to stray from your long-term investment plan and miss out on potential gains.

If you’re struggling to keep your emotions in check, try dollar cost averaging, which is the process of periodically buying an investment with a fixed amount of money. NerdWallet has a list of online brokers and robo-advisors that offer this type of account with low fees and minimums.

Check out dividend-paying stocks

In addition to checking out a stock’s price history and financial data, investors should also consider the company’s dividend history. Look for companies with a long track record of paying and increasing their dividends. This is especially important since the economy’s recent volatility has seen many dividend-paying stocks cut their payouts. Lastly, investors should also pay attention to the ex-dividend date. This is the first day that new shareholders are not eligible to receive the current dividend, which will instead be paid to the previous owners.

Investors often focus on price gains when considering their returns, but they should remember that income-focused investing can boost total returns. That’s because dividends, when reinvested, can significantly bolster overall total returns.

For those looking for a low-risk way to grow their wealth, dividend stocks are an excellent option. These stocks typically come from large, well-established companies and offer steady streams of income. However, they are not a suitable investment for everyone. Investors should consider their individual goals and timelines when determining how much of their portfolio to dedicate to these stocks.

Rather than investing in individual stocks, many investors should consider index funds or mutual funds. These are baskets of dozens or even hundreds of stocks that mirror market indices. This provides broader exposure to the market and can eliminate the need for intensive research on individual stocks.

Explore new industries

Stocks are the most common way for ordinary people to invest in growing companies and build wealth over time. To get started, open an investment account. You can do this with a traditional brokerage account or with your 401(k) or Roth IRA. You can also invest in mutual or index funds, which are baskets of hundreds of stocks that mirror market indices such as the S&P 500. These fund options are easier to manage than individual stocks and can offer a better balance between risk and reward.

When you buy a share of stock, it confers partial ownership of a company and potentially a slice of its profits. However, it doesn’t entitle you to a parking spot in the company lot or a seat at its shareholder meetings. Instead, you hope the company’s value — and thus its stock price — will rise while you hold on to it, netting you a profit in the process.

Many investors fail to make money in stocks because they trade too often or lose too much when prices decline. Experts recommend staying invested for long periods, which requires patience and discipline. To help you stick to your plan, consider investing through dollar-cost averaging, a strategy that involves regularly buying a certain amount of shares. You can also use a robo-advisor, an automated investment service that manages your portfolio for a small fee. Check out NerdWallet’s ratings of online brokers and robo-advisors to find the best option for you.

Conclusion

Investing in stocks is one of the best ways to build wealth, especially over time. However, most people don’t make tons of money in stocks overnight. Instead, it’s a long-term game that requires patience, diversification, and investing on a regular basis. Here are a few tips on how to make money in stocks: open an investment account, pick stock funds instead of individual stocks, use the “buy and hold” strategy, check out dividend-paying stocks, and explore new industries.

It’s also important to consider your risk tolerance, and not take too much or too little risk. Investors who frequently trade in and out of the market on a daily, weekly, or monthly basis often miss out on the power of compounding gains. It’s also a good idea to stick with the “buy and hold” strategy because it’s less expensive than trading, which can eat into your returns.