Every investment in this world, no matter how small or large, is made with a purpose, that is, to earn money. With so many options to invest, investing in stocks is considered as one of the best and worldwide practices. Stocks or shares are the official documents that allow you to be a part of a corporation and have your say in decision making. However, the main purpose of investing in stocks is to earn money through a share in the profits of that particular corporation. You buy shares and pay a certain price for those shares which allow you to make yourself a shareholder in the profits of the company.
Every financial activity, no matter its size, needs proper planning to carry it out. Similarly, investing in stocks also needs proper planning and a strategy to make it a fruitful and rewarding activity. Everyone can invest in stocks but the real problem that needs to be addressed is, how to invest in stocks or how to make money in stocks? Isn’t it the real thing to ask for? Financial investment bears high risk and if you don’t know how to invest in stocks or how to make money in stocks than you might end up losing your money.
Stocks and shares are traded in the stock market. A stock market is a place where buyers meet sellers to purchase or sell stocks, commodities, and securities, etc. Stock markets can be an un-wanting or confusing place if you do not know how to make money in the stock market. But, does it mean that if you are a beginner and you can not learn how to invest in stocks? Well, the simplest answer to that is “no”. It is not that difficult to learn how to invest in stocks. This guide will help you to understand important things about stocks and how to invest in stocks.
How to make money in stocks- Beginners’ Guide
As mentioned earlier, investing in stocks give you the right to be a shareholder in a company’s profit. Companies pay dividends (profit) to their shareholders and everyone can invest in stocks. It does not matter if you are a job holder or a sole proprietor or even a laborer. You can acquire stocks directly from stockholders or you can acquire them in stock markets. Let us discuss some very basic but necessary things.
–Who can invest in stocks: Everyone can invest in stocks irrespective of their professions or businesses except the minors. However, an adult can buy stocks on behalf of a minor. This can be done using a custodial account or guardian account. Both of them work in different ways. Government employees can also invest in stocks but there are certain limitations for them and these limitations vary in different countries.
–Minimum requirements for investment: There is no minimum limit for investing in stocks but it is highly recommended by experts that a minimum investment should be 500$ to 1000$. However, there are some requirements for the investors relating to maintaining a minimum amount in their trading accounts. For example, a stock day trader must have a minimal amount of 25000$ in his/her account at any time if he opts to trade for at least four times in a time span of five days. Moreover, if someone is investing in stocks then there no benchmark of minimum amount.
–Where to buy stocks: Stocks can be acquired online by creating an investment account at an online broker. In some countries, you can also purchase stocks directly from stockholders. Moreover, there are some corporations that facilitate the investors and you purchase stock directly from those companies.
As for beginners, stocks let you earn money with the help of two ways. One is through dividends and the other one is through growth. Dividends are paid by the companies to their stockholders. The rate of dividends is generally fixed or decided by the companies every year. For example, you acquired 5000 shares of a company and the company pays a dividend of 5$ annually. In this case, you will earn 25000$ every year until you sell your stocks. Companies always pay the dividends on the face value of the share irrespective of the market value of the share. If a company pays a 10% dividend annually and the face value of each share is 20$ and its market value is 40%, then the amount of dividend per share will be 2$ (20$ ×10%= 2$).
The other way to earn money with stocks is through growth. Stock prices of strong, stable and growing companies mostly follow an increasing trend. Stock prices keep increasing and stockholders can earn money by selling stocks at higher prices even if the companies are not declaring dividends. Let’s say, you purchased stocks of XYZ company at a cost of 20$ per share and after share, the market value of that stock reaches 30$. Now, if you sell your shares than you will earn a profit of 10$ per share.
How to make money in stock market- Top strategies
-Mutual funds: When you invest in stocks you expect to earn profits (dividends) against it. Sometimes, companies suffer loses and they may not declare dividends. This can be very frustrating and can disturb your financial condition and you may consider selling your stocks but imagine if the stock prices are also going down then what will be your strategy? There can be a worst-case scenario and that is, the company you invested in might get hit with heavy losses and those events eventually lead to company winding up. You might lose all your investment. Even if the company is growing, it might not declare dividends and you need money. Still, the only option for you might be selling your stocks.
However, there is an alternative and more effective approach to this. Rather than investing in a single company, creating a mutual fund scheme will be a better strategy. What is a mutual fund? A mutual fund in the simplest of terms can be defined as a collection or portfolio of shares or stocks. Let us say that if you invest in multiple companies than not only it will decrease the risk factor but it can also help you earn money consistently. Investing in multiple companies minimizes the chances of losses as even if you are not getting dividends from one company you can still get dividends from others in your portfolio. This will help you keep your financial circle moving as many companies pay dividends quarterly or semi-annually.
A very well known American investor and writer, William O’Neil, devised one of the best strategies. He made a comprehensive model for how to make money in stock market, how to invest in stocks. His strategy constituted two parts. Radical and technical analysis of the stock market. The technical part deals with using the raw form of data or information effectively while radical analysis deals with keeping an eye on news and events occurring in the stock market. This strategy devised by William O’Neil is adopted very frequently and commonly. Let’s have a look at this method of making money in the stock market. CANSLIM is actually an abbreviation or acronym and each letter represents seven different terms. We will discuss each part sequentially.
Radical Analysis ( C A N)
C – current earnings (quarterly): O’Neil proposed an idea of considering earning per share (EPS) factor plays a much significant role as compared to the price to earnings (P/E) factor. The main reason behind this idea was that only those companies can be favorable for the investors which are showing continuous growth over time. If a company is growing then it means its stock prices are also rising. This thing goes in favor of stock investors even if the earning per share (EPS) is constant or fixed. He favored those stocks with a minimum growth of 25%. If there is an increasing trend every quarter, then the stock prices will most likely go upwards.
A – Annual earnings per share: According to O’Neil, a company that shows average annual growth has stocks of high value. A company that is not growing annually is not a safe place to invest. He mentioned a “5-year growth rule”. This rule works as a scanner and can help to skip the “weaker stocks” who have zero or very little growth. According to him, a company, who has at least a 25% annual growth rate, is a safe and profiting place to invest. Moreover, a 17% return on investment (ROI) is the other factor that should be considered.
N – New services or products: Changes in management, new products, new services can lead to a rise in stock prices. Companies that are innovative have stronger and constantly growing stocks. People love innovation and if there is something they like, they will pay for it. The companies who are trendsetters can sell their products at higher prices as long as they are innovative and exceeding customer’s expectations. Microsoft Corporation, Apple Inc., Facebook Inc., are a few examples of innovation and creativity. They are the leading firms in their relevant industry. On the other hand, Nokia Inc. and Blockbuster Inc. are two famous examples who lost everything just because they ignored market needs related to innovation and creativity. McDonald’s saw a rise by 1100% in its value over a span of 5 years (1971-1976).
O’Neil said, companies who bring innovation and creativity have a strong potential to grow in the market and investing your money in these companies is highly recommended.
Technical analysis (SLIM)
S – Supply & demand (float): Cumulative number of shares in the capital formation of a corporation shows the number of potential shares that are accessible for buying. Supply of float is another idea which means the number of stocks that are open to managers of the corporation for acquisition after subtracting stocks.
O’Neil in his research on flourishing stocks of the market made a conclusion that a huge portion of prosperous stocks has a float of lesser than 25%. The speculation behind that is the stocks that are accessible to the general public rarely change and it is just like the big stone which is tough to tremble. But the shares with low float percentages are easily varying.
L- Leader in industries: It is really vital to pay consideration to industrial organization, because, the ablest stock in a bad industrial organization is a much worse thing than a bad stock in the most suitable industrial organization. People have this tendency to purchase the stocks for which they have a liking or they feel good and comfortable. These stocks are normally touching and have unordinary and irrational inconstancies in the market rather than steady and advance movement.
To particularize leading stocks in the industry, the relative strength of the stock price is used as a measure that calculates the performance of stocks with respect to changes in the total average of the market or in some scenarios all of the other stocks. O’Neil said if that relative strength of the stocks is equal to or more than 70%, then this means that stock is one of the leading stock.
I – Institutional Holding: Big investment corporations obtain benefits from very robust research groups to choose and bear stock in their portfolios. O’Neil reached an outcome that when a stock is added in a collection of one or more (at most4 to 5) investment corporations, it is the stock that has better potential for growth. As far as this is concerned large legal companies with research and consulting groups are favorable.
M – Market’s direction: O’Neil suggested that the analysis and decision making should also be based on a very vital factor that is the direction of the market. You must be aware of where the market is heading. Keep your focus on the stocks which show upward movement mostly.
This strategy is a complete and comprehensive guide for those who are looking for answers about how to invest in stocks and make money in the stock market.
-Keep yourself in the game: “Patience is a virtue”, you must have heard this proverb. Everything that comes after patience and tolerance is always sweet. As an investor, you must have to have this virtue of patience. Suppose, when you start a business you even settle for a break-even point at the start. Your main objective at that point is to put your business on its feet, at that moment you try your best to keep yourself in the race. If you want to know how to invest in stocks, then patience is the most important ingredient to make money in the stock market.
Banks and bonds also offer a return on your investment but still, most people go for the stocks. Why? The answer to this question is that stocks offer a higher rate of return as compared to bonds and banks. But return on bonds and banks is always a fixed percentage or ratio and your investment does not grow. On the other hand, your investment in stocks grows over a period of time and the average rate of return on stocks is approximately 10% on an annual basis. Yet, so many investors fail to earn that attractive 10% return on stocks. The only reason is that they do not invest long enough, they lose their patience. You must understand that more time spent in the stock market, more will be the chances to earn higher figures but mostly, due to lack of patience, investors sell their stocks at wrong times and fail to cash in at the right times.
The best and profiting companies have this habit of reinvesting the profits and expand the business operations. This not only helps companies grow but it also strengthens their stock prices. Now imagine, if a company is in a growing phase and it is not paying the dividends for the time being and you are getting frustrated. But, if you consider it in the long term, then you will realize that the company is growing and its stock prices are also increasing. This means if 2 years ago you invested 20000$ in stocks of a company, then, it’s worth today will be definitely more than 20000$. Even if you choose to sell your stocks at this point, you will still be selling them on profit. But, if you opt to wait a little longer than that, you can earn profits in two ways. 1st, you can receive dividends in the future at higher rates. 2nd, you can even sell your stocks at even higher prices.
But, what investors do is that they sell their stocks at the wrong time. They do all the hard work and when it is time to enjoy the perks of the hard work, they lose patience and sell their stocks. So, someone else gets what you were supposed to get. The other mistake investors make is that they get worried about occasional or short term price fluctuations. If you are buying and selling shares frequently then investing in stocks is not a game for you. Investing in stocks should be a long term investment.
One wise strategy is to buy stocks when their prices are falling and selling them when prices are moving upwards but what investors do is, they start buying stocks when their prices are increasing as they think it is the right time to buy stocks. However, when they see that the prices of those stocks are decreasing, they think that they should sell their stocks to avoid further loses. So, in reality, they are buying at higher prices and selling at lower prices? Not a wise strategy at all.
Things that need to be avoided
The stock market is a very tricky and funny place where stocks are sold and purchased on a daily basis yet buyers are afraid to buy. The reason for that is market fluctuation which creates panic and fear among the investors. Here are a few things that you need to avoid as an investor if you want to make money in the stock market.
-Waiting too long for the market to be safe: As discussed earlier, investors are mostly afraid of investing when the stock prices are falling because they feel that it is not safe yet to invest in stocks and they should wait until the prices are stable. This sounds like a rational approach, right? However, it is not, because you are not waiting for it to be safe but you are waiting for the prices to go up again. In this way, you will be missing an opportunity to buy stocks at lower prices and selling them at higher prices.
-Waiting for stock prices to fall: In the previous paragraph, we discussed that when stock prices are decreasing investors are afraid to buy stocks. However, there is a kind of investors that wait for stock prices to fall so that they can buy stocks at lower prices. This is a very wise strategy but waiting too long can also be a bad thing. The reason for that is the stock prices of strong and growing companies are mostly on the rising side and they rarely face a downward trend in their stock prices. So, too much greed is also not a wise move.
-Getting bored of your stocks: As discussed earlier, investing in stocks is game patience. If you want instant profits or getting rich over the night, then investing in stocks is not the right thing for you. Investing in stocks is not like a lottery or a jackpot in a casino. If you want regular returns then investing in index stocks might be a better option for you and you can enjoy that 8-10% return on them but, if you want to earn higher profits and you can show resilience and patience, then, investing in individual stocks is surely a recommended business for you because if you have learned how to be patient during tricky periods then you have learned how to invest in stocks.
So, the bottom line is, invest in mutual funds, apply the CANSLIM marketing strategy about how to make money in stock market and do not lose your patience with temporary fluctuations in a stock market. Remember, if you consider investing in stocks as a short term investment then this is not how it works. Investing in stocks should be a long term investment to get desired and maximum outputs. This guide will definitely be helpful in learning how to invest in stocks and make money in the stock market.