The stock market is a mysterious entity. To some, it may seem like a casino. Others see it as an ATM. With the rise of Robinhood, more and more individual investors have been pouring money into the stock market. I’m sure you’ve seen your friend or neighbor talk about their portfolio gains, and I have good news for you. You can make money, too. There are many ways to make money in stocks. Here are a few examples.
What are Stocks?
A stock is a piece of a company. That’s it.
When companies want to gain access to a new source of funding, a popular choice is to “go public.” This is done through a process called an Initial Public Offering, or IPO. This process creates shares of that company that can be traded with anyone around the world. These shares are also known as stocks.
The stock market is the place where people go to trade stocks with one another. Essentially, this is a flea market for a small ownership in companies. However, this flea market consists of millions of buyers and sellers with trillions of dollars moving around.
With all of these buyers and sellers, the price is continuously moving. The more buyers a stock has, the more it will go up. The more sellers a stock has, the more it will go down. These price fluctuations might make people nervous. After all, if the goal is to increase your wealth, why put your money into a place where you could lose money?
Actually, the fact that price changes is the only reason you can make money in stocks. If the price never changed, how would you make any money? And yes, stock prices will go down eventually. That’s totally normal. But, if you employ certain strategies, you could even view these downward movements as opportunities to make more money.
There are plenty of investing strategies out there. Below are some of the most popular strategies for making money in stocks.
How to Make Money in Stocks – Investment Strategies
Strategy #1. Value Investing
Value investing is a strategy that attempts to find stocks that are “on sale.” Developed by Benjamin Graham and popularized by Warren Buffett, this strategy involves picking individual stocks that are trading below their intrinsic value.
“Price is what you pay. Value is what you get.”Warren Buffett
The important part of value investing is to always keep price in mind. Only buy stocks when the price has a large enough margin of safety.
Value investors make their investing decisions based on the price of the stock and the fundamentals of a company.
In the eyes of a value investor, the best kind of investment is a stock trading below its normal price that continues to have solid fundamentals.
Strategy #2. Growth Investing
Viewed commonly as value investing’s opposite, growth investing focuses less on fundamentals. In the mind of a growth investor, a stock is an entity of its own and shouldn’t be viewed as a part of the business itself. This strategy involves picking individual stocks as well.
Growth investors usually invest in “high-rising” companies with an expectation to grow. Historical and future earnings, profit margins, and stock price performance are a few factors that growth investors will use to evaluate a stock.
In the eyes of a growth investor, the best kind of investment is a small, young company with expectations to expand tremendously.
Strategy #3. Index Investing
Index investing has risen in popularity over the recent years. Instead of picking individual stocks like the first two methods, index investors will put money into an ETF that tracks the market as a whole. Index investors do not concern themselves with trading stocks. They prefer to buy and hold for the long-term instead.
This strategy is simple and is viewed by some to be much less risky than investing in individual stocks. Several studies have indicated that, for the average investor, a passive strategy is better.
Index investing is commonly accompanied with another strategy called dollar-cost averaging. The idea is to put money in on a consistent basis. DCA advocates claim that this reduces your risk against down markets. By putting money in on a consistent basis, your average cost basis will even put across the ups and downs of the market.
Strategy #4. Dividend Investing
Like index investors, dividend investors buy and hold for as long as possible. Unlike index investing, dividend investing involves picking individual stocks. Dividend investing involves buying stocks that (1) pay a good dividend yield, (2) have a stable or increasing dividend, and (3) have rock solid fundamentals.
The goal of a dividend investor is to disregard stock price fluctuations altogether. Since the idea is to hold the stock forever, short-term price movements shouldn’t matter. What does matter to a dividend investor is getting money back on their investment in a safe, stable way.
Dividend investors commonly pair their strategy with a DRIP–dividend reinvestment program. Instead of a cash dividend, DRIP users will instead receive more shares of stock. This will compound your returns until you eventually switch to a cash dividend.
The best investment for a divided investor is a dividend-paying stock with a high yield, a history of stability, and increasing dividends.
Strategy #5. Short Selling
All of the above strategies can work if the stock market is going up.
What if the market is going down? Can you still make money?
You bet your ass you can. The most popular strategy for doing so is called short selling. Take the premise of buying stocks. If stocks go up, you make money. Now, flip that on its head.
Short selling profits when stocks go down. Essentially, you agree to borrow a stock for the current price and then buy it at the market price later. Say the price is $100 now, and you expect the stock to go down from here. If you short the stock and the price goes to $80, you end up buying the stock for $80 and selling it back to the borrower for $100.
The problem with short selling is the risk associated with it. Stock prices have infinite upside, but can only drop down to zero. Said another way, short selling has a limited upside and an unlimited downside.
Statistically speaking, that is. Then again, the average bear market happens every 6 years and loses 36%. Big money can be made if timed correctly.
The best investment for a short seller is a massively overpriced stock that has nowhere to go but down.
Strategy #6. Option Investing
If you got your investing knowledge on TikTok, you probably already know what this is. But do you know the risks?
Stock options are contracts to buy or sell an underlying stock. They are very lucrative because the entry price is minimal. For instance, as of September 2020, you can buy an AT&T (T) call option for only $7. If the price goes up, you may double your money.
If the price goes down, you may lose more than you put in. Stock options can be generous or cruel, depending on the direction of the stock price movements.
Option investing is one of the riskiest ventures a person could get into. There is big money to be made here, but you could also lose everything. Not everything you bet. Everything you have. Option investing, if done incorrectly, could lead you into a hole 100 times bigger than the amount you started with.
That’s right. In option investing, you could end up with a bill afterwards. In fact, most people that put their money in options lose it all.
In the end, you need to do your own research (this feels like a recurring theme). There are many strategies out there–many more than I could include in one blog post.
And don’t take my word for it. I’m just some guy on the internet. What you need to do is listen to yourself. Try things out and do what works for you.
Workshop it as you go along and keep improving your strategy. As renowned artist Pablo Picasso said, “good artists copy; great artists steal.” There’s no shame in stealing another philosophy if it works for you.
DISCLAIMER: Investing is an inherently risky operation. Past performance is not a guarantee of future returns. All information presented is for educational purposes only and should not be taken as investing advice.