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How to Make Money in the Stock Market

Introduction to the Stock Market

It’s Monday 9 AM; the stock market is about to open. Traders rush to their desks and get ready for the last 30 minutes they will have to prepare for the beginning of the trading week. Everyone wonders why they should invest in the stock market, but it is really simple as to why.

The stock market offers the opportunity to use cash to purchase shares of a company. It is exciting, to buy an ownership share of a company. As a shareholder, you now will be entitled to any dividends the company pays.

However, there are numerous ways to profit from the stock market. Most people will invest only in a 401k or Roth IRA, but this is not the only way to invest in stocks.

Here are some ways to profit from the stock market:

Investing in the Stock Marketstock market over time

 

Buying stocks is one of the easiest ways to benefit from the stock market. When an investor purchases a share, the investor is hoping the share price will increase so they can sell it for a higher rate than they bought. This is also known as capital gains on the stock.

Investors are also able to profit from dividends. Dividends are paid to investors by the company to hold the share of the stock. Most blue-chip companies pay a dividend every quarter, but some pay monthly.

If you’d like to make money through dividends, the easiest way is to buy into a company that pays an increasing dividend. You’ll then want to hold and reinvest the bonuses through a DRIP plan or invest in another company.

Dividends are an easy way to continue to grow your wealth through compounding. They provide investors with a passive income stream and can help offset any losses in the share price.

Dollar-Cost-Averaging

dollar-cost-averaging

Since many people who invest in the stock market do not have an idea of what they are doing, a lot of people opt for dollar-cost-averaging. Dollar-cost-averaging is where an investor will buy shares of stock or a fund on a weekly or a monthly basis to average out the purchasing price.

If the stock market takes a dip, the investor will buy 1.5x-2.5x the usual amount of shares they purchase. The investor will profit over time because they are buying more shares at a lower price.

Dollar-cost averaging is probably the most common and efficient way to invest when you are beginning to trade stocks.

Value Investing

One of the most common ways to make money investing in the stock market is through a process known as value investing. Value investing is when an investor analyzes the fundamentals of the company and tries to buy shares below the intrinsic value of the stock.

Examples of fundamentals are the company’s income statement, balance sheet, and statement of cash flows. Investors will use data that the company has put on these financial statements to see if the company is currently trading below or at its book value.

If the investor finds the company to be currently undervalued, they will invest in the stock and hold until they believe the company is overvalued. Usually, the stocks value investors pick are dividend-paying stocks. The reason that value investors mainly choose dividend stocks is to collect dividends while they are waiting for the share price to increase back to the standard share price and to offset losses.

Trading

Trading a different and more active way of profiting from the stock market. Traders analyze charts and the news and profit by making short-term trades that they can benefit from quickly. A lot of traders will treat the stock market as an income stream rather than an investment.

Traders profit from buying (going long) or short-selling (going short) on a stock. Traders take advantage of market fluctuations and volatility to make quick money. However, with trading, you are susceptible to a lot of risks, and nobody should go into trading without reading a trading course.

Swing-Trading

Swing-trading is one form of trading that traders use regularly. Swing traders will analyze daily and weekly charts to predict where a stock will go in the upcoming weeks or months.

Swing-trading can be done by anyone and has no restrictions on who can place swing trades. This differs from day-trading which does have certain limits.

Day-Trading

Day-trading is a more active approach to trading the market. To be considered a day trade, a trade must be fully executed within the same trading day. A day trader will buy and sell a stock within the same trading day in an attempt to make a profit from fluctuations in the market.

Day traders can profit by trading hourly and minute charts to try and catch small fluctuations. To be able to place more than four-day trades in one week, a trader must have $25,000 in his or her brokerage account. FINRA places these restrictions to prevent inexperienced traders from losing money attempting to day-trade.

Conclusion

Investing and trading are two different methods to profit from the stock market. Many people cannot decide as to which they’d rather be, and I would advise trying both.

Try to learn to trade for income, and invest for long-term wealth. Trading for profit allows you the possibility to make money from your computer. Investing allows you to build your net worth and your passive income stream.

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