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How to make money in stocks
If you're looking to make money in stocks, there are a few things you need to know. Here's how to get started.
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1. Pick an investment account
You'll need an investment account to buy stocks. An investment account is similar to a bank account: You put money into it, and then you can use that money to buy stocks. An investment account, such as a 401(k), Roth IRA or traditional brokerage account, is not an investment itself: It's where your investments will live.
There are several types of investment accounts, and choosing the right account for you to invest in may save you a lot of money on taxes. It may even benefit you to have multiple different investment accounts. For example, financial advisors often tell people to start investing with a 401(k), an investment account offered through employers, especially if the employer offers a match. Then, they often say to start investing in either a Roth or traditional IRA for tax benefits, then a traditional brokerage account if you have money left over.
» First things first. Here’s how to open a brokerage account — it only takes about 15 minutes.
2. Consider index funds
If you want to make money in stocks, there is an easier way to do it than buying a bunch of individual stocks. Index funds are made up of dozens or even hundreds of stocks that mirror a market index such as the S&P 500, so you don't need much knowledge about the individual companies to succeed.
With index funds, you're investing in lots of stocks all at once, and you don't have to manage them individually. Investing through funds can help decrease your risk: If you are invested in three companies and one goes out of business, it will probably hit your portfolio pretty hard. If you're invested in 500 companies and one goes out of business, it probably won't affect you as much.
Yes, it's possible to earn higher returns with individual stocks than in an index fund, but you’ll need to put some sweat into researching companies to earn those returns, and the likelihood that you'll actually lose money is higher.
» Learn more: Read our full explainer on stocks vs. funds
3. Stay invested with the "Buy and hold" strategy
The key to making money in stocks (remember, if you're investing in funds, you're still investing in stocks) is remaining in the stock market, financial advisors say. Your length of time in the market is the best predictor of your total performance. The buy and hold strategy is exactly what it sounds like — you buy stocks that you believe will perform well over the long-term, then hold onto them for years to come.
The stock market’s average return is a cool 10% annually — better than you can find in a bank account or bonds. But many investors fail to earn that 10% simply because they don't stay invested long enough. They often move in and out of the stock market at the worst possible times, missing out on annual returns. Making money in stocks doesn't happen overnight. Some people day trade and try to turn a quick profit, but day trading comes with additional risks.
Most financial advisors will tell you that you should invest only money that you won't need for at least five years. That way, you have time to ride out market ups and downs and still make money.
For long-term investors, a market downturn can simply mean stocks and other investments are on sale. If you're not already investing, you can take advantage with one of our picks for the best investment accounts.
The more time you're invested in the market, the more opportunity there is for your investments to go up. The best-performing stocks tend to increase their profits over time, and investors reward these greater earnings with a higher stock price. That higher price translates into a return for investors who own the stock.
4. Check out dividend-paying stocks
More time in the market also allows you to collect dividends, if the company pays them. If you’re trading in and out of the market on a daily, weekly or monthly basis, you can kiss those dividends goodbye because you probably won’t own the stock at the critical points on the calendar to capture the payouts. You can even invest in high-dividend exchange-traded funds (a type of fund similar to an index fund).
» Explore our list of the best brokers for stock trading
3 excuses that keep you from making money investing
The stock market is the only market where the goods go on sale and everyone becomes too afraid to buy. That may sound silly, but it’s exactly what happens when the market dips even a little, as it often does. Investors become scared and sell in a panic. Yet when prices rise, investors plunge in headlong. It’s a perfect recipe for “buying high and selling low.”
To avoid both of these extremes, investors have to understand the typical lies they tell themselves. Here are three of the biggest:
1. 'I’ll wait until the stock market is safe to invest.'
This excuse is used by investors after stocks have declined, when they’re too afraid to buy into the market. Maybe stocks have been declining a few days in a row or perhaps they’ve been on a long-term decline. But when investors say they're waiting for it to be safe, they mean they’re waiting for prices to climb. So waiting for (the perception of) safety is just a way to end up paying higher prices, and indeed it is often merely a perception of safety that investors are paying for.
What drives this behavior: Fear is the guiding emotion, but psychologists call this more specific behavior "loss aversion." That is, investors would rather avoid a short-term loss at any cost than achieve a longer-term gain. So when you feel pain at losing money, you’re likely to do anything to stop that hurt. So you sell stocks or don’t buy even when prices are cheap.
2. 'I’ll buy back in next week when it’s lower.'
This excuse is used by would-be buyers as they wait for the stock to drop. But investors never know which way stocks will move on any given day, especially in the short term. A stock or market could just as easily rise as fall next week. Many seasoned investors buy stocks when they’re cheap and hold them over time.
What drives this behavior: It could be fear or greed. The fearful investor may worry the stock is going to fall before next week and waits, while the greedy investor expects a fall but wants to try to get a much better price than today’s.
3. 'I’m bored of this stock, so I’m selling.'
This excuse is used by investors who need excitement from their investments, like action in a casino. But smart investing can actually be boring. The best investors sit on their stocks for years and years, letting them compound gains. Investing is not a quick-hit game, usually. All the gains come while you wait, not while you’re trading in and out of the market.
What drives this behavior: an investor’s desire for excitement. That desire may be fueled by the misguided notion that successful investors are trading every day to earn big gains. While some traders do successfully do this, even they are ruthlessly and rationally focused on the outcome. For them, it’s not about excitement but rather making money, so they avoid emotional decision-making.