Investing Money in Stocks: Can It Really Help You Earn an Income?
When it comes to the stock market, you have people who swear by it, others who are intrigued by it, and some who believe that it’s rigged. Many people are getting predictable results and steady returns on the stock market, so we know that it’s more than just gambling. There is definitely a way to make money on the stock market even if you’re a beginner with a limited budget, but it’s far from easy. Let’s take a look at whether it’s actually possible to earn a real income investing in stocks, and a few tips on how to get there.
How Much Money Can You Make Investing in Stocks?
This is a tough question to answer since there are so many variables. If you have a good strategy, start early, and manage your gains and savings properly, you could make a lot of money with the stock market. Stocks in general offer a 7-10% return over a few years, but they can do worse or better on any given year. You also have to consider that the stock market as a whole tends to go up and that a lot of the money that is gained through stock investing does not come from trades, but dividends. This means that your day-to-day decisions are not the only thing that will affect how much money you can make from the stock exchange.
The composition of your portfolio will matter as well. If you want more stability and the ability to make a steady income from your stocks, then dividends are the way to go. This is why we would suggest you check out this article on Canadian dividend stocks by Wealthsimple. They explain exactly what dividend stocks are and why they could be a good option. They run down some of the best dividend stocks in the country along with some advice on how to discover great ones on your own.
Why Do People Fail with the Stock Market?
With that being said, you should know that the wide majority of the people who trade on the stock either fail or barely break even. It’s estimated that around 90% of all investors fail to make a profit. Out of those, 10% break-even while 80% lose money. These should be harrowing numbers for anyone thinking of investing, but one of the major reasons why so many fail is because of bad decisions or flaws in their approach.
One of the biggest mistakes investors make when they get started is looking at stocks as just stocks. In reality, you should be investing in companies. Too many investors try to capitalise on swings at the beginning when they should go for the long game. Swing trading demands a lot of understanding of technical analysis and should be left to advanced traders only.
Long-term investments don’t only work for beginners either. People like Warren Buffet are a perfect example. He says that he only invests in companies he believes will survive for another 10 years even if the stock market shuts down. He doesn’t only look at a stock’s price movement, but how the company is managed and goes for companies with branding and pricing power. This is one of the reasons why Berkshire Hathaway has been able to outperform the S&P for 39 years over the last 48 years.
This might seem like a boring strategy and not what you imagined when you were thinking of investing, but that’s what investors, not traders, do. This is also the best method if you want steady returns over the long run.
Should You Be Picking Stocks Yourself?
There are many ways that you can invest in the stock market, and not all of them involve you individually picking stocks. Picking winning stocks consistently is very tough, even for seasoned investors. This is why many people advise that you look at other products such as ETFs instead.
ETFs consist of a basket of stocks but are traded over the market just like individual stocks are. You can pick an ETF that tracks the performance of certain indices like the S&P 500 or specific industries. This means that you don’t need to do as much research into obscure stocks. Instead, you can benefit from upwards movements in the market as a whole or certain industries.
Also, know that you don’t have to pick the ETFs yourselves. You can use what is called robo-advisors to pick them for you. A robo-advisor will ask you specific questions about things like your budget, your tolerance to risk, your age, etc. They will then pick investments based on where you are in your life, where you want to be, and how much risk you can handle.
A robo-advisor can also adjust your strategy as you get older. For instance, if you want to build a nest egg for retirement, a robo-advisor might advise riskier investments earlier in your life while you still have a lot of earning potential, then switch to more secure investments as you grow older.
What If I Want to Directly Trade Stocks?
If you absolutely want to trade stocks, then you have to be ready to learn and make some mistakes early on. The first thing you’ll have to learn is how to read a basic chart and how to use technical analysis tools like the RSI and the stochastic, among others.
Forget about trading the news or trying to time the market. Only research will allow you to make sound and informed decisions that will not be influenced by emotions. To be a real investor, you will have to enter trades with an investor’s mindset. And no one in their right mind would invest in a business without learning everything there is to know about it.
Before investing in a company, you should first look at its balance sheet, not their flashy announcements or hot new products. All of these things can affect the price of the stock, but they will often only affect it in spurts. The fundamentals of a company are what should give you a better indication of where it’s heading long term.
One of the most important things you need to pay attention to when looking at a company’s balance sheet is how much debt the company has. You should also look at cash flow numbers and how they’re using their cash reserves. Another very important metric to look at is the earnings-per-share ratio.
The price of a stock is not always a reflection of its earnings. There are many cases when shares of a stock are skyrocketing while revenue remains flat. This is often a sign of a stock that is overvalued. A stock with a reasonable earnings-per-share ratio with a nice balance sheet and great management is much more likely to be successful in the long run.
The Importance of Diversification
There is one thing that all successful investors have in common, and it’s that they all have diversified portfolios. Most great investors do not limit their investing to stocks either. A good portfolio should have a good combination of assets that could compensate for each other in case of a downturn. You could have a portfolio with things like bonds, gold, index funds, cryptocurrency, and REIT investments, for instance. This would allow you to have something to fall back on if there’s a blood bath in one of these markets.
Have Realistic Expectations
We mentioned earlier that only 10% of people end up beating the stock market, but that doesn’t mean that they all become millionaires. The majority are making enough to beat inflation, that’s it. So, don’t assume that you’re going to be rich overnight on the stock market. You might be able to get rich, but it certainly won’t be fast, especially if you’re starting with limited capital.
There is no need to rush. The most reliable method is to start slowly and let compound interest take care of the rest. You might not be able to get the riches and the glitzy lifestyle, but you’ll gain satisfaction in knowing that your money is working for you and that you’ll be able to enjoy financial independence once you can’t earn anymore.
Get Some Practice in First
Another mistake you should avoid is starting too big, too fast. Some people have a lot of capital saved up and might want to make big moves, but you should start by making small trades instead. You should also spend a lot of time doing some paper trading. While it won’t have the same emotional load as real-life trading, trading should be made based on strategy first. Paper trading will allow you to try different strategies without getting burned.
You should also have clear goals before you start building a strategy. Some people may want to get some residual income from their investments. Others may want to profit from movements in the market, while others may want to build a nest egg for retirement. These are all very different goals that will require different strategies, so make sure that you outline your objectives first.
Making money with stocks is possible, but only a few succeed. You can put the odds in your favor if you’re ready to invest in your education, move cautiously, and revise your idea of what it means to be an investor.