How to Make Money in Stocks

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How to make money in stocks: a guide for beginners to set proper goals and avoid the biggest mistakes.

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 for you. Thanks to the magic of compounding interest, the more you invest (not just save but invest), the more it will work for you.

While investing intelligently can be as simple as patiently contributing to an index fund, investing in stocks themselves offers opportunities to make more money, if you're willing to tolerate a little more risk and do more homework.

That's abstract. There are two ways to make money in stocks, depending on the amount of work you want to put in and your appetite for possibly losing everything: trading stocks and investing in stocks.

How to Make Money Trading Stocks

Trading stocks means buying and selling. The important principle here is to find and exploit mismatches between what people think the stock is worth and are willing to pay for it over time. You can find these opportunities in multiple cases, including:

  1. Positive or negative announcements about the business, including getting new patents, losing legal challenges, receiving analyst ratings, and releasing earnings.
  2. Broader market trends, such as fears of economic news, annual selloffs and slowdowns, and uncertainty over political events.
  3. 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.

Your main advantage here is information, and information can be ephemeral. You're working against countless other people, many of whom are also trying to outsmart you and everyone else.

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 can get there in time.

How to Make Money Investing in Stocks

Investing in stocks means investing in businesses. Yes, you buy and sell stocks, but the distinction Trendshare makes is that people who invest in businesses think like owners of the business. How does the company make money? Will it be around in five years? 10? 50? What will that take?

Thinking like an owner is different from thinking like a trader. You have more patience, but you also have to understand more about the business itself. You can find opportunities in cases including:

  1. New stocks with strong companies, poised to take advantage of growth opportunities.
  2. Existing companies with competitive advantages (plenty of cash or other assets, strong brands, other economic moats)
  3. Businesses emerging from periods of bad news, whether legal questions, changes in analyst ratings, slow sales times, even business cycles

Figuring out the strength of the business and its opportunity to succeed as a business means understanding what makes the business work. That's the real homework for investing. 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 this Active Investing Worth It?

All of this takes time and effort. 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, on the other hand, you're the kind of person who wants to know what your money is doing for you, you can do it. Whether this is the active investing of you buying and selling stocks regularly or the passive investing of letting index funds work for you, 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.

What is Fundamental Analysis? | What is Passive Investing?