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How to make money in stocks: a beginner's guide. Set proper goals and avoid the biggest mistakes.
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Investing During the Coronavirus Pandemic
Money is leverage.
After you've paid your bills every month—rent or mortgage, food, transportation—what you have left is a tool you can use to amuse yourself, save yourself time and effort, or make more money. Thanks to the magic of compounding interest, the more you invest (not just save but invest), the more your money will work for you.
While investing intelligently can be as simple as patiently contributing to an index fund, investing directly in stocks can be a great opportunity, if you're willing to tolerate a little more risk and do more homework.
There are two strategies to make money with stocks: trading and investing.
Make Money Trading Stocks
Trading stocks means buying and selling. Buy low, sell high. Buy when people are selling and sell when people are buying.
That sounds straightforward, but there's a nuance here. For this to work, you have to find and exploit mismatches between what people think the stock is worth and are willing to pay for it over time. These opportunities appear as:
- Positive or negative announcements about the business, including patent grants, losing legal challenges, analyst rating changes, and earnings announcements
- Broad market trends, such as fears of economic news, annual selloffs and slowdowns, and political uncertainty
- Technical issues related to the administration of the stock, such as dividend and ex-dividend dates, lockup periods, sales by corporate offers, splits, buybacks, mergers, and divestitures
You can find bargains here. It's not uncommon to hear a rumor of one company buying out another and see a 10-20% gain for the purchased stock—if you get there in time.
Your main advantage here is information, but information is ephemeral. You're working against countless other people, many of whom are also trying to outsmart you. If you're right and quick, you can make money. If you're right and too slow, you won't.
Make Money Investing in Stocks
Investing in stocks means investing in businesses. You still buy and sell stocks, but investing means thinking like an owner. How does the company make money? Will it be around in five years? 10? 50? What has to go right for that to happen?
Thinking like an owner is different from thinking like a trader. You have more patience, but you also have to understand the business itself. Investing opportunities appear as:
- New stocks with strong companies, poised to grow
- Existing companies with competitive advantages (plenty of cash or other assets, strong brands, other economic moats)
- Businesses emerging from periods of bad news, including legal questions, analyst rating changes, slow sales, and business cycles
How does a business succeed? What do you look at to figure this out? You have plenty of financial metrics to choose from, but something like discounted cash flow is easy to manage (because it's tied to real cash) and easy to calculate.
You don't have to outsmart or out-time other investors; you just have to be correct enough that the business can do what it needs to do. Unlike trading, you spend your time finding great businesses then waiting for good prices, rather than finding mismatches on both the buying and selling side.
Is Active Investing Worth It?
Whether you're looking for short-term opportunities to exploit or studying businesses, you'll have to learn things: patterns of human behavior, the decisions which add up to patterns which affect stock prices, the nature of the businesses you're trading. If you're looking for something easy—a way to double $1,000 overnight—you're not going to find it. (That'll take luck.)
If you're ready to understand what your money is doing for you, you can do it. This may be the active investing of you buying and selling stocks regularly or the passive investing of letting index funds work for you. In both cases, you're making your money work on your own schedule, not letting someone else manage it for you.
After all, it's your money. You're trying to save for a house, to pay for college, to give you a nest egg when you retire, even to retire early. It'll take hard work and research and time and patience, but you can do it.
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