How to make money in stocks

By Henry Cooper

Dec 23, 2022

Reading time: 4 min

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Can you make money in stocks quickly? The answer is no. No investment will bring quick and easy money. It takes time to learn, research, analyze, and wait for the price to reach a certain level.

However, you can speed up this process if you learn how to choose the right stocks, develop an effective strategy, and choose between investment products.

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How to choose the right stocks

How can I earn money from stocks? It’s the main question that implies numerous points you need to consider. The first one is the ability to choose the right stocks.

In 2020, the stock market fell by 40% due to the COVID-19 pandemic but reached its maximum price within a few months. However, some companies couldn’t recover.

Determine your goals

Your portfolio may vary regarding your goals. If you are a conservative investor, you should use blue-chip stocks. These are shares of stable companies that stay afloat in good and bad times.

If you look for companies that provide additional income, you can choose those that pay considerable dividends regularly. Their stocks may grow slowly, but significant dividends compensate for this limitation.

If you are ready to take risks, you can choose young companies with promising potential. Such investments are dangerous because you never know whether a new company will stay in the market.

Do a comprehensive research

The role of market capitalization in investments

Stock investing requires lots of research and metric evaluation. To determine a company’s economic health, you need to:

Check the industry’s performance. It’s vital to know in what industry the company operates. If there are signs of the industry’s development, the company will grow. If there are problems in the industry, the company will suffer too.
Check the company’s key metrics. All companies must provide data about their performance at certain intervals. The most important metrics are income, profit, price-to-earn ratio, price-to-book ratio, free cash flow, price/earnings-to-growth ratio, and debt-to-equity ratio. You should evaluate how the company performed during several reporting periods.
Check the company’s competitors. To evaluate whether the company performs well, it’s worth comparing it with its rivals. If the company has competitive advantages, its stocks will grow faster than its competitors’ stocks.

How to make money in stocks: develop your strategy

Numerous investment strategies explain how to allocate funds, how often to invest, and when to take profits. However, the best way is to use one strategy as a basis and develop your own.

Determine your approach. First, you need to decide how often you want to invest and reconsider your portfolio. For example, if you are risk-averse, you will invest in stocks that have a growth potential in the long run.
Define how much you can invest. You should define in advance how much you can invest. Remember that any investment implies risks. Therefore, you shouldn’t invest more than you can afford. It’s better to buy fewer stocks than lose everything.

There is an interesting rule. Your age affects the amount of funds you invest in risky assets, such as stocks. Subtract your age from 110. For instance, if you are 20 years old, you can put 90% of your investments in stocks and 10% in stable assets. If you are 40, 70% of your investments should be in stocks and 30% in stable securities.

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How to make money in stocks: review

There are two ways you can invest in stocks.

Individual stocks

You can choose stocks of a particular company and buy them on a stock exchange or directly.

When investing in stocks, you should diversify your portfolio with securities of companies from different industries and with varying potentials for growth. Therefore, this approach may take time, as you will need to choose and analyze several companies.

Funds

Another way is to invest in a fund. It can be a mutual fund or an ETF (exchange-traded fund). Such funds usually track a stock market index — for instance, the S&P 500 or DJIA.

Investing in a fund, you diversify your portfolio without needing to analyze and choose different stocks manually.

Moreover, the funds can be actively and passively managed. Actively managed funds are controlled by portfolio managers and analysts; therefore, they have higher fees. Passively managed funds are mostly automated but have human oversight.

Takeaway

Stock investing requires lots of skills and knowledge. Although you can choose a fund that will allocate your funds with the help of portfolio managers, you should understand whether their investments can bring returns or you better withdraw your funds.

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