How to make money in stocks in 5 steps: Step-by-step beginner's guide

Generating profits from stocks typically involves a long-term approach, as significant gains overnight are rare. Here's a guide to steadily increasing your wealth through stock investments.

Generating profits from stock investments

To earn profits from stocks, start by opening an investment account and purchasing stocks or stock-based funds. Implement the "buy and hold" strategy, consider investing in dividend-paying stocks, and explore opportunities in emerging industries.

• Establish an investment account
• Opt for stock funds over individual stocks
• Embrace the "buy and hold" approach to investment
• Consider investing in dividend-yielding stocks
• Explore emerging industries for potential opportunities

Establish an investment account

To generate profits with stocks, it's essential to have an investment account. Similar to a bank account, an investment account allows you to deposit funds, which can then be used to purchase stocks. It's important to note that an investment account, whether it's a 401(k), Roth IRA, or traditional brokerage account, is not an investment itself but rather the platform where your investments are held.

There are various types of investment accounts available, and selecting the right one can have significant tax-saving advantages. It may be advantageous to have multiple investment accounts. For instance, financial advisors often recommend starting with a 401(k) if offered by your employer, especially if there's an employer match. Subsequently, they suggest considering either a Roth or traditional IRA for tax benefits, followed by a traditional brokerage account for any remaining funds.

Opt for stock funds over individual stocks

If you're aiming to profit from stocks, there's a simpler and often more lucrative method than purchasing individual stocks: investing in index funds. Index funds consist of numerous stocks, sometimes hundreds, mirroring a market index like the S&P 500. This approach requires minimal knowledge about individual companies to succeed.

By investing in index funds, you're essentially spreading your investment across multiple stocks simultaneously, without the need for individual management. This diversification can help mitigate risk. For instance, if you're invested in only a few companies and one goes bankrupt, it could significantly impact your portfolio. However, if you're invested in hundreds of companies and one fails, the impact is likely to be less severe.

While it's technically possible to achieve higher returns with individual stocks compared to index funds, it typically requires extensive research and entails a higher risk of losses.

Embrace the "buy and hold" approach to investment

According to financial advisors, the key to earning profits in stocks—whether you're investing in funds or individual stocks—is remaining invested in the stock market over time. The duration of your investment in the market is the most reliable indicator of your overall performance. The "buy and hold" strategy entails purchasing stocks you believe will perform well in the long run and retaining them for extended periods.

Historically, the stock market has delivered an average annual return of approximately 10%, surpassing the returns from bank accounts or bonds. However, many investors fail to achieve this 10% return simply because they don't stay invested for a sufficient duration. Frequently, they enter and exit the stock market at inopportune moments, missing out on potential annual returns. It's important to recognize that making money in stocks is not an overnight endeavor. While some individuals engage in day trading to seek quick profits, this approach carries additional risks.

Most financial advisors advise investing only funds that you won't require for at least five years. This timeframe allows investors to navigate market fluctuations and still realize gains over time.

The longer you remain invested in the market, the greater the opportunity for your investments to appreciate. High-performing stocks typically demonstrate an upward trajectory in profits over time, which attracts investor interest and drives up the stock price. This increase in price results in returns for investors who hold the stock.

Consider investing in dividend-yielding stocks

Remaining invested in the market for longer periods also enables investors to receive dividends, provided the company issues them. Constantly buying and selling stocks on a short-term basis—such as daily, weekly, or monthly—may result in missing out on dividend payments because you might not hold the stock during the crucial dates for dividend distribution. Alternatively, investors can opt for high-dividend exchange-traded funds (ETFs), which function similarly to index funds but focus on stocks with high dividend yields.

Explore emerging industries for potential opportunities

Certain industry stocks, like those in commodities, have established track records, while others, like those in AI (Artificial Intelligence), are currently experiencing rapid growth—though this could change. While selecting individual stocks carries inherent risks, exploring emerging industries can be intriguing. However, it's crucial to conduct thorough research on the industry and potential investments beforehand. To mitigate risk, consider investing in industry exchange-traded funds (ETFs), such as AI ETFs, which offer exposure to a basket of stocks within a specific sector rather than individual companies.

Debunking three investing myths

Waiting for the stock market to stabilize

Some individuals postpone investing during market downturns, anticipating a safer environment for investment once prices rebound. This behavior stems from "loss aversion," where investors prioritize avoiding short-term losses over long-term gains. Consequently, they may refrain from purchasing stocks even when prices are low.

Timing the market

Another misconception involves attempting to predict market movements and waiting for opportune moments to buy stocks at lower prices. However, market fluctuations are unpredictable in the short term, and attempting to time entry points carries inherent risks. Instead, seasoned investors often adopt a strategy of purchasing stocks when they're undervalued and holding onto them over time.

Impulsive selling due to boredom

Some investors may be drawn to the excitement of investing in dynamic sectors like cryptocurrencies or individual stocks. While investing can indeed be enjoyable, successful wealth-building often entails a more patient approach. The most successful investors typically hold onto their investments for extended periods, allowing them to grow steadily over time.

While it's common to experience apprehension about investing, particularly given market volatility, individuals experiencing intense fear or aversion may benefit from seeking guidance from a financial therapist to address underlying emotional barriers to investing.