Making money in stocks is usually a long-term game: Very few people clean up overnight. People who make money by investing do so by consistently putting money away over a long period of time.
While consistency and time are important in investing, some strategy can help too. Tactics like "buying and holding" and reinvesting dividends can likely increase your returns. Here's how to sustainably grow your wealth with stocks.
1. Open an investment account
First thing's first: You need to have an investment account to buy stocks. Opening an investment account is similar to opening a bank account. You can add money to your account through a bank transfer, then you can use that money to buy stocks. An investment account is not an investment itself: It's where your investments live.
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There are several types of investment accounts. Choosing the right account for you may save a lot of money on taxes. It may even benefit you to have a few different investment accounts. For example, financial advisors often say to start investing through a 401(k) (a workplace investment account) if it's available to you. That's especially true if the employer offers a match. Then, they say to start investing in either a Roth or traditional IRA for tax benefits. Then you can move to a traditional brokerage account if you have money left over.
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Learn how to open a brokerage account2. Consider stock funds instead of individual stocks
If you want to make money in stocks, there is a much easier, and often more lucrative, way to do it: index funds. These investments are made up of dozens or even hundreds of stocks that mirror a market index, such as the S&P 500. With index funds, or exchange-traded funds, you don't need to know much about the individual companies to succeed.
Instead, 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. For example, if you are invested in three companies and one goes out of business, your overall portfolio will likely drop. If you're invested in 500 companies and one goes out of business, it probably won't affect you as much.
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Sure, it's possible to earn more money with individual stocks than index funds, but you’ll need to do a lot of work first. You'll have to do a lot of research on individual companies. And even with all that work, you're still less likely to make more money than just by investing in funds.
» Learn more: Stocks vs. funds
3. Stay invested with the "buy and hold" strategy
The key to making money in stocks (if you're investing in funds remember that you're still investing in stocks) is staying invested. 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 stock investments that you think will perform well over time, then hold onto them for years to come.
The stock market’s average return is a cool 10% annually before inflation. 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.
The more time you're invested in the market, the more opportunity there is for your investments to go up. The best-performing stocks increase their profits over time and investors continue to buy the stock. That in turn increases the 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. Dividends are regular distributions of profits that some companies pay out to shareholders.
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Best high-dividend stocks right nowIf you’re trading stocks often, you won’t own the stock long enough to capture the dividend payouts. There are also dividend ETFs you might consider for more diversification.
And when you reinvest those dividends? You can boost your total return. That means electing to put dividend payouts back into buying more shares of the stock or ETF. You can likely automate this process through your brokerage account — we have a list of the best brokers for dividend stocks that do this well.
5. Explore new industries
If you're interested in investing in stocks for the rush, index funds or ETFs may not do it for you. So it's fine to set aside a small portion of your portfolio to check out individual companies or industries that feel more exciting.
Some industry stocks, like commodity stocks, are tried and true. Others, like AI stocks, are booming now — but that may change. You'll want to research the industry and any potential investments first. One way to take less risk is to invest in industry ETFs, such as AI ETFs rather than AI stocks.
6. Dollar-cost average
The stock market is the only market where the goods go on sale and everyone gets a little nervous about buying. That may sound silly, but it’s exactly what happens when the market dips. Investors understandably become scared and often sell in a panic. But when prices rise, investors plunge in headlong. It’s a perfect recipe for “buying high and selling low" instead of "buying low and selling high."
To avoid that, you can employ a strategy called dollar-cost averaging. With this approach, you invest at regular intervals over time. This makes it so, on average, you're not putting a whole bunch of money into the market when the price is either very high or very low.
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Dollar-cost averaging sounds fancy, but there's a good chance you're already doing it. If you have a 401(k) or other retirement account through work, and you have selected investments in that account, your employer pulls contributions out of your paycheck on a regular schedule and deposits them into your 401(k) for you. Once they're in there, the 401(k) administrator invests the money in the investments you've selected, allocated in the amounts you have directed. This is dollar-cost averaging — investing on a regular basis whether the market is up or down. If you don't have an employer-sponsored retirement account, a similar system is possible in an IRA or other brokerage account.
