How to make money stocks and shares - thought differently
Can You Earn Money in Stocks?
The New York Stock Exchange (NYSE) was created on May 17, 1792, when 24 stockbrokers and merchants signed an agreement under a buttonwood tree at 68 Wall Street. Countless fortunes have been made and lost since that time, while shareholders fueled an industrial age that’s now spawned a landscape of too-big-to-fail corporations. Insiders and executives have profited handsomely during this mega-boom, but how have smaller shareholders fared, buffeted by the twin engines of greed and fear?
Key Takeaways
- Buy-and-hold investing in equities offers the most durable path for the majority of individual investors.
- According to a 2011 Raymond James and Associates study on asset performance trends from 1926 to 2010, both small-cap stocks (12.1% annual return) and large-cap stocks (9.9% return) outperformed government bonds and inflation.
- The two main types of equity investment risk are systematic, which stems from macro events like recessions and wars, and unsystematic, which refers to one-off scenarios that afflict a particular company or industry.
- Many people combat unsystematic risk by investing in exchange-traded funds or mutual funds, in lieu of individual stocks.
- Common investor mistakes include poor asset allocation, trying to time the market, and getting emotionally attached to stocks.
The Basics of Stocks
Stocks make up an important part of any investor's portfolio. These are shares in a publicly-traded company that are listed on a stock exchange. The percentage of stocks you hold, what kind of industries in which you invest, and how long you hold them depend on your age, risk tolerance, and your overall investment goals.
Discount brokers, advisors, and other financial professionals can pull up statistics showing stocks have generated outstanding returns for decades. However, holding the wrong stocks can just as easily destroy fortunes and deny shareholders more lucrative profit-making opportunities.
In addition, those bullet points won’t stop the pain in your gut during the next bear market, when the Dow Jones Industrial Average (DJIA) could drop more than 50%, as it did between October 2007 and March 2009.
Dow Jones Historical Annual Returns
Retirement accounts like 401(k)s and others suffered massive losses during that period, with account holders ages 56 to 65 taking the greatest hit because those approaching retirement typically maintain the highest equity exposure.
The Employee Benefit Research Institute
The Employee Benefit Research Institute (EBRI) studied the crash in 2009, estimating it could take up to 5 years for 401(k) accounts to recover those losses at an average 5% annual return. That’s little solace when years of accumulated wealth and home equity are lost just before retirement, exposing shareholders to the worst possible time in their lives.
That troubling period highlights the impact of temperament and demographics on stock performance, with greed inducing market participants to buy equities at unsustainably high prices while fear tricks them into selling at huge discounts. This emotional pendulum also fosters profit-robbing mismatches between temperament and ownership style, exemplified by an uninformed crowd speculating and playing the trading game because it looks like the easiest path to fabulous returns.
Making Money in Stocks: The Buy-and-Hold Strategy
The buy-and-hold investment strategy became popular in the 1990s, underpinned by the "four horsemen of tech"—a quartet of huge technology stocks (Microsoft (MSFT), Intel Corp. (INTC), Cisco Systems (CSCO), and the now-private Dell Computer) fueling the rise in the internet sector and driving the Nasdaq to unprecedented heights. They seemed like such sure things that financial advisors recommended them to clients as companies to buy and hold for life. Unfortunately, many folks following their advice bought late in the bull market cycle, so when the dotcom bubble burst, the prices of these inflated equities collapsed too.
Despite such setbacks, the buy-and-hold strategy bears fruit with less volatile stocks, rewarding investors with impressive annual returns. It remains recommended for individual investors who have the time to let their portfolios grow, as historically the stock market has appreciated over the long term.
The Raymond James and Associates Study
In 2011, Raymond James and Associates published a study of the long-term performance of different assets, examining the 84-year period between 1926 and 2010. During that time, small-cap stocks booked an average 12.1% annual return, while large-cap stocks lagged modestly with a 9.9% return. Both asset classes outperformed government bonds, Treasury bills (T-bills), and inflation, offering highly advantageous investments for a lifetime of wealth building.
Equities had a particularly strong performance between 1980 and 2010, posting 11.4% annual returns. But the real estate investment trust (REIT) equity sub-class beat the broader category, posting 12.3% returns, with the baby boomer-fueled real estate bubble contributing to that group’s impressive performance. This temporal leadership highlights the need for careful stock picking within a buy-and-hold matrix, either through well-honed skills or a trusted third-party advisor.
Large stocks underperformed between 2001 and 2010, posting a meager 1.4% return while small stocks retained their lead with a 9.6% return. The results reinforce the urgency of internal asset class diversification, requiring a mix of capitalization and sector exposure. Government bonds also surged during this period, but the massive flight to safety during the 2008 economic collapse likely skewed those numbers.
The James study identifies other common errors with equity portfolio diversification, noting that risk rises geometrically when one fails to spread exposure across capitalization levels, growth versus value polarity, and major benchmarks, including the Standard & Poor’s (S&P) 500 Index.
In addition, results achieve optimal balance through cross-asset diversification that features a mix between stocks and bonds. That advantage intensifies during equity bear markets, easing downside risk.
The Importance of Risk and Returns
Making money in the stock market is easier than keeping it, with predatory algorithms and other inside forces generating volatility and reversals that capitalize on the crowd’s herd-like behavior. This polarity highlights the critical issue of annual returns because it makes no sense to buy stocks if they generate smaller profits than real estate or a money market account.
While history tells us that equities can post stronger returns than other securities, long-term profitability requires risk management and rigid discipline to avoid pitfalls and periodic outliers.
Modern Portfolio Theory
The modern portfolio theory provides a critical template for risk perception and wealth management. whether you’re just starting out as an investor or have accumulated substantial capital. Diversification provides the foundation for this classic market approach, warning long-term players that owning and relying on a single asset class carries a much higher risk than a basket stuffed with stocks, bonds, commodities, real estate, and other security types.
We must also recognize that risk comes in two distinct flavors: systematic and unsystematic. The systematic risk from wars, recessions, and black swan events—events that are unpredictable with potentially severe outcomes—generates a high correlation between diverse asset types, undermining diversification’s positive impact.
Unsystematic Risk
Unsystematic risk addresses the inherent danger when individual companies fail to meet Wall Street expectations or get caught up in a paradigm-shifting event, like the food poisoning outbreak that dropped Chipotle Mexican Grill's stock more than 500 points between 2015 and 2017.
Many individuals and advisors deal with unsystematic risk by owning exchange-traded funds (ETFs) or mutual funds instead of individual stocks. Index investing offers a popular variation on this theme, limiting exposure to S&P 500, Russell 2000, Nasdaq 100, and other major benchmarks.
Index funds whose portfolios mimic the components of a particular index can be either ETFs or mutual funds. Both have low expense ratios, compared to regular, actively managed funds, but of the two, ETFs tend to charge lower fees.
Both approaches lower, but don’t eliminate unsystematic risk because seemingly unrelated catalysts can demonstrate a high correlation to market capitalization or sector, triggering shock waves that impact thousands of equities simultaneously. Cross-market and asset class arbitrage can amplify and distort this correlation through lightning-fast algorithms, generating all sorts of illogical price behavior.
Common Mistakes Investor Make
The 2011 Raymond James study noted that individual investors underperformed the S&P 500 badly between 1988 and 2008, with the index booking an 8.4% annual return compared to a limp 1.9% return for individuals.
How to explain this underperformance? Investor missteps bear some of the blame. Some common mistakes include:
Lack of diversification: Top results highlight the need for a well-constructed portfolio or a skilled investment advisor who spreads risk across diverse asset types and equity sub-classes. A superior stock or fund picker can overcome the natural advantages of asset allocation, but sustained performance requires considerable time and effort for research, signal generation, and aggressive position management. Even skilled market players find it difficult to retain that intensity level over the course of years or decades, making allocation a wiser choice in most cases.
However, asset allocation makes less sense in small trading and retirement accounts that need to build considerable equity before engaging in true wealth management. Small and strategic equity exposure may generate superior returns in those circumstances while account-building through paycheck deductions and employer matching contributes to the bulk of capital.
Market timing: Concentrating on equities alone poses considerable risks because individuals may get impatient and overplay their hands by making the second most detrimental mistake such as trying to time the market.
Professional market timers spend decades perfecting their craft, watching the ticker tape for thousands of hours, identifying repeating patterns of behavior that translate into a profitable entry and exit strategies. Timers understand the contrary nature of a cyclical market and how to capitalize on the crowd’s greed or fear-driven behavior. This is a radical departure from the behaviors of casual investors, who may not fully understand how to navigate the cyclical nature of the market. Consequently, their attempts to time the market may betray long-term returns, which could ultimately shake an investor’s confidence.
Emotional bias: Investors often become emotionally attached to the companies they invest in, which can cause them to take larger than necessary positions, and blind them to negative signals. And while many are dazzled by the investment returns on Apple, Amazon, and other stellar stock stories, in reality, paradigm-shifters like these are few and far between.
What's required is a journeyman’s approach to stock ownership, rather than a gunslinger strategy. This can be difficult because the internet tends to hype the next big thing, which can whip investors into a frenzy over undeserving stocks.
Know the Difference: Trading vs. Investing
Employer-based retirement plans, such as 401(k) programs, promote long-term buy and hold models, where asset allocation rebalancing typically occurs only once per year. This is beneficial because it discourages foolish impulsivity. As years go by, portfolios grow, and new jobs present new opportunities, investors cultivate more money with which to launch self-directed brokerage accounts, access self-directed rollover individual retirement accounts (IRAs), or place investment dollars with trusted advisors, who can actively manage their assets.
On the other hand, increased investment capital may lure some investors into the exciting world of short-term speculative trading, seduced by tales of day trading rock stars richly profiting from technical price movements. But in reality, these renegade trading methods are responsible for more total losses than they are for generating windfalls.
As with market timing, profitable day trading requires a full-time commitment that’s nearly impossible when one is employed outside the financial services industry. Those within the industry view their craft with as much reverence as a surgeon views surgery, keeping track of every dollar and how it’s reacting to market forces. After enduring their fair shares of losses, they appreciate the substantial risks involved, and they know how to shrewdly sidestep predatory algorithms while dismissing folly tips from unreliable market insiders.
Studies That Analyze Day Trading
In 2000, TheJournal of Finance published a University of California, Davis study that addressed common myths ascribed to active stock trading. After polling more than 60,000 households, the authors learned that such active trading generated an average annual return of 11.4%, from 1991 and 1996—significantly less than the 17.9% returns for the major benchmarks during the same period. Their findings also showed an inverse relationship between returns and the frequency with which stocks were bought or sold.
The study also discovered that a penchant for small high-beta stocks, coupled with over-confidence, typically led to underperformance, and higher trading levels. This supports the notion that gunslinger investors errantly believe that their short-term bets will pan out. This approach runs counter to the journeyman’s investment method of studying long-term underlying market trends, to make more informed and measured investment decisions.
in a 2015 study, authors Xiaohui Gaoand Tse-Chun Lin offered interesting evidence that individual investors view trading and gambling as similar pastimes, noting how the volume on the Taiwan Stock Exchange inversely correlated with the size of that nation’s lottery jackpot. These findings line up with the fact that traders speculate on short-term trades in order to capture an adrenaline rush, over the prospect of winning big.
Interestingly, losing bets produce a similar sense of excitement, which makes this a potentially self-destructive practice, and explains why these investors often double down on bad bets. Unfortunately, their hopes of winning back their fortunes seldom pan out.
Finances, Lifestyle, and Psychology
Profitable stock ownership requires narrow alignment with an individual’s personal finances. Those entering the professional workforce for the first time may initially have limited asset allocation options for their 401(k) plans. Such individuals are typically restricted to parking their investment dollars in a few reliable blue-chip companies and fixed income investments that offer steady long-term growth potential.
On the other hand, while individuals nearing retirement may have accumulated substation wealth, they may not have enough time to (slowly, but surely) build returns. Trusted advisors can help such individuals manage their assets in a more hands-on, aggressive manner. Still, other individuals prefer to grow their burgeoning nest eggs through self-directed investment accounts.
Self-directed investment retirement accounts (IRAs) have advantages—like being able to invest in certain kinds of assets (precious metals, real estate, cryptocurrency) that are off-limits to regular IRAs. However, many traditional brokerages, banks, and financial services firms do not handle self-directed IRAs. You will need to establish the account with a separate custodian, often one that specializes in the type of exotic asset you're investing in.
Younger investors may hemorrhage capital by recklessly experimenting with too many different investment techniques while mastering none of them. Older investors who opt for the self-directed route also run the risk of errors. Therefore, experienced investment professionals stand the best chances of growing portfolios.
It’s imperative that personal health and discipline issues be fully addressed before engaging in a proactive investment style because markets tend to mimic real life. Unhealthy, out-of-shape individuals who carry low self-esteem may engage in short-term speculative trading because they subconsciously believe they’re unworthy of financial success. Knowingly partaking in risky trading behavior that has a high chance of ending poorly may be an expression of self-sabotage.
The Ostrich Effect
A 2006 study published in the Journal of Business coined the term the "ostrich effect," to describe how investors engage in selective attention when it comes to their stock and market exposure, viewing portfolios more frequently in rising markets and less frequently (or “putting their heads in the sand”) in falling markets.
The study further elucidated how these behaviors affect the trading volume and market liquidity. Volumes tend to increase in rising markets and a decrease in falling markets, adding to the observed tendency for participants to chase uptrends while turning a blind eye to downtrends. Over-coincidence could offer the driving force once again, with the participant adding new exposure because the rising market confirms a pre-existing positive bias.
The loss of market liquidity during downturns is consistent with the study’s observations, indicating that “investors temporarily ignore the market in downturns—so as to avoid coming to terms mentally with painful losses.” This self-defeating behavior is also prevalent in routine risk management undertakings, explaining why investors often sell their winners too early while letting their losers run—the exact opposite archetype for long-term profitability.
Panic-Inducing Situations
Wall Street loves statistics that show the long-term benefits of stock ownership, which is easy to see when pulling up a 100-year Dow Industrial Average chart, especially on a logarithmic scale that dampens the visual impact of four major downturns.
The 84 years examined by the Raymond James study witnessed no less than three market crashes, generating more realistic metrics than most cherry-picked industry data.
Ominously, three of those brutal bear markets have occurred in the past 31 years, well within the investment horizon of today’s baby boomers. In-between those stomach-wrenching collapses, stock markets have gyrated through dozen of mini-crashes, downdrafts, meltdowns, and other so-called outliers that have tested the willpower of stock owners.
It’s easy to downplay those furious declines, which seem to confirm the wisdom of buy and hold investing, but psychological shortcomings outlined above invariably come into play when markets turn lower. Legions of otherwise rational shareholders dump long-term positions like hot potatoes when these sell-offs pick up speed, seeking to end the daily pain of watching their life savings go down the toilet.
Ironically, the downturn ends magically when enough of these folks sell, offering bottom fishing opportunities for those incurring the smallest losses or winners who placed short sale bets to take advantage of lower prices.
Black Swans and Outliers
Nassim Taleb popularized the concept of a black swan event, an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences, in his 2010 bookThe Black Swan: The Impact of the Highly Improbable. He describes three attributes for a black swan:
- It’s an outlier or outside normal expectations.
- It has an extreme and often destructive impact.
- Human nature encourages rationalization after the event, “making it explainable and predictable.”
Given the third attitude, it’s easy to understand why Wall Street never discusses a black swan’s negative effect on stock portfolios.
The term "black swan," meaning something rare or unusual, originated from the once widespread belief that all swans were white—simply because no one had ever seen one of a different color. In 1697, the Dutch explorer Willem de Vlamingh spied black swans in Australia, exploding that assumption. After that, the term "black swan" morphed to suggest an unpredictable or impossible thing that actually is just waiting to occur or be proven to exist.
Shareholders need to plan for black swan events in normal market conditions, rehearsing the steps they’ll take when the real thing comes along. The process is similar to a fire drill, paying close attention to the location of exit doors and other means of escape if required. They also need to rationally gauge their pain tolerance because it makes no sense to develop an action plan if it’s abandoned the next time the market enters a nosedive.
Of course, Wall Street wants investors to sit on their hands during these troubling periods, but no one but the shareholder can make that life-impacting decision.
How Do Beginners Make Money in the Stock Market?
Beginners can make money in the stock market by:
Starting early—thanks to the miracle of compounding (when interest is earned on already-accrued interest and earnings), investments grow exponentially. Even a small amount can grow substantially if left untouched.
Thinking long-term—the stock market has its ups and downs, but historically, it's appreciated—that is, increased in value—over the long haul. Having a far-off time horizon smooths out the volatility of short-term market dips and drops.
Being regular—invest in a constant, disciplined manner. Take advantage of your employer's 401(k), if one exists, which automatically will deduct a percentage of your paycheck to invest in funds you choose. Or adopt a strategy like dollar-cost averaging, investing equal amounts, spaced out over regular intervals, in certain assets, regardless of their price.
Relying on the pros—don't try to pick stocks yourself. There are financial professionals whose job is to "manage money," and when you invest in a mutual fund, ETF, or other managed fund, you're tapping into their expertise, experience, and analysis. Leave the driving, er, investing, to them, in other words. Investing in funds also has the advantage of diversification—their portfolios own dozens, even hundreds of individual stocks—which cuts risk.
Can You Make a Lot of Money in Stocks?
Yes, if your goals are realistic. Although you hear of making a killing with a stock that doubles, triples, or quadruples in price, such occurrences are rare, and/or usually reserved for day traders or institutional investors who take a company public.
For individual investors, it's more realistic to base expectations on how the stock market has performed on average over a certain time period. For example, the S&P 500 Index (SPX), widely considered a benchmark for the U.S. stock market itself, has returned nearly 15% in the last five years, 12% in the last 10 years. Since 1990, its value (as of 2021) has increased eleven-fold, from 330 to 4127.
S&P 500 Historical Annual Returns
What Are Three Ways to Make Money in the Stock Market?
Three ways to make money in the stock market are:
Sell stock shares at a profit—that is, for a higher price than you paid for them. This is the classic strategy, "buy low, sell high."
Short-selling—This strategy is a reverse of the classic one above; it might be dubbed "sell high, buy low." When you sell short, you borrow shares of stock (usually from a broker), sell them on the open market, and then buy them back later—if and when the price drops. Returning the shares to the lender, you pocket the profit. Short-selling is a bet that a stock will decline in value.
Collecting dividends—Many stocks pay dividends, a distribution of the company's profits per share. Typically issued each quarter, they're an extra reward for shareholders, usually paid in cash but sometimes in additional shares of stock.
How Do You Take Profits From Stocks?
The ultimate aim of every investor is to make a profit from their stocks, of course. But knowing when to actually cash out and take that profit, locking in gains, is a key question, and there's no one right answer. Much depends on an investor's risk tolerance and time horizon—that is, how long they can afford to wait for the stock to earn, vis-a-vis how much profit they want to earn.
Don't be greedy. Some financial pros recommend taking a profit after a stock has appreciated around 20% to 25% in price—even if it still seems to be rising. "The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again," as Investor's Business Daily founder William O'Neil put it.
Other advisors use a more complex rule of thumb, involving gradual profit-taking. Jeffrey Hirsch, chief market strategist at Probabilities Fund Management and editor-in-chief of The Stock Market Almanac, for example, has an "up 40%, sell 20%" strategy: When a stock goes up by 40%, sell 20% of the position; when it goes up another 40%, sell another 20%, and so on.
The Bottom Line
Yes, you can earn money from stocks and be awarded a lifetime of prosperity, but potential investors walk a gauntlet of economic, structural, and psychological obstacles. The most reliable path to long-term profitability will start small by picking the right stockbroker and beginning with a narrow focus on wealth building, expanding into new opportunities as capital grows.
Buy-and-hold investing offers the most durable path for the majority of market participants. The minority who master special skills can build superior returns through diverse strategies that include short-term speculation and short selling.
How To Make Money In Stocks
Ask any financial expert, and you’ll hear stocks are one of the keys to building long-term wealth. But the tricky thing with stocks is that while over years they can grow in value exponentially, their day-to-day movement is impossible to predict with total accuracy.
Which begs the question: How can you make money in stocks?
Actually, it isn’t hard, so long as you adhere to some proven practices―and practice patience.
1. Buy and Hold
There’s a common saying among long-term investors: “Time in the market beats timing the market.”
What does that mean? In short, one common way to make money in stocks is by adopting a buy-and-hold strategy, where you hold stocks or other securities for a long time instead of engaging in frequent buying and selling (a.k.a. trading).
That’s important because investors who consistently trade in and out of the market on a daily, weekly or monthly basis tend to miss out on opportunities for strong annual returns. Don’t believe it?
Consider this: The stock market returned 9.9% annually to those who remained fully invested during the 15 years through 2017, according to Putnam Investments. But, if you went in and out of the market, you jeopardized your chances of seeing those returns.
- For investors who missed just the 10 best days in that period, their annual return was only 5%.
- The annual return was just 2% for those who missed the 20 best days.
- Missing the 30 best days actually resulted in an average loss of -0.4% annually.
Clearly, being out of the market on its best days translates to vastly lower returns. While it might seem like the easy solution is simply to always make sure you’re invested on those days, it’s impossible to predict when they will be, and days of strong performance sometimes follow days of large dips.
That means you have to stay invested for the long haul to make sure you capture the stock market at its best. Adopting a buy and hold strategy can help you achieve this goal. (And, what’s more, it helps you come tax time by qualifying you for lower capital gains taxes.)
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2. Opt for Funds Over Individual Stocks
Seasoned investors know that a time-tested investing practice called diversification is key to reducing risk and potentially boosting returns over time. Think of it as the investing equivalent of not putting all of your eggs in one basket.
Although most investors gravitate toward two investment types—individual stocks or stock funds, such as mutual funds or exchange-traded funds (ETF)—experts typically recommend the latter to maximize your diversification.
While you can buy an array of individual stocks to emulate the diversification you find automatically in funds, it can take time, a fair amount of investing savvy and a sizable cash commitment to do that successfully. An individual share of a single stock, for instance, can cost hundreds of dollars.
Funds, on the other hand, let you buy exposure to hundreds (or thousands) of individual investments with a single share. While everyone wants to throw all of their money into the next Apple (AAPL) or Tesla (TSLA), the simple fact is that most investors, including the professionals, don’t have a strong track record of predicting which companies will deliver outsize returns.
That’s why experts recommend most people invest in funds that passively track major indexes, like the S&P 500 or Nasdaq. This positions you to benefit from the approximate 10% average annual returns of the stock market as easily (and cheaply) as possible.
3. Reinvest Your Dividends
Many businesses pay their shareholders a dividend—a periodic payment based on their earnings.
While the small amounts you get paid in dividends may seem negligible, especially when you first start investing, they’re responsible for a large portion of the stock market’s historic growth. From September 1921 through September 2021, the S&P 500 saw average annual returns of 6.7%. When dividends were reinvested, however, that percentage jumped to almost 11%! That’s because each dividend you reinvest buys you more shares, which helps your earnings compound even faster.
That enhanced compounding is why many financial advisors recommend long-term investors reinvest their dividends rather than spending them when they receive the payments. Most brokerage companies give you the option to reinvest your dividend automatically by signing up for a dividend reinvestment program, or DRIP.
4. Choose the Right Investment Account
Though the specific investments you pick are undeniably important in your long-term investing success, the account you choose to hold them in is also crucial.
That’s because some investment accounts give you the benefit of certain tax advantages, like tax deductions now (traditional retirement accounts) or tax-free withdrawals later (Roth). Whichever you choose, both also let you avoid paying taxes on any gains or income you receive while the money is held in the account. This can turbo charge your retirement funds as you can defer taxes on these positive returns for decades.
These benefits come at a cost, though. You generally cannot withdraw from retirement accounts, like 401(k)s or individual retirement accounts (IRAs), before age 59 ½ without paying a 10% penalty as well as any taxes you owe.
Of course, there are certain circumstances, like burdensome medical costs or dealing with the economic fallout of the Covid-19 pandemic, that let you tap into that money early penalty-free. But the general rule of thumb is once you put your money into a tax-advantaged retirement account, you shouldn’t touch it until you’ve reached retirement age.
Meanwhile, plain old taxable investment accounts don’t offer the same tax incentives but do let you take out your money whenever you want for whatever purpose. This lets you take advantage of certain strategies, like tax-loss harvesting, that involve you turning your losing stocks into winners by selling them at a loss and getting a tax break on some of your gains. You can also contribute an unlimited amount of money to taxable accounts in a year; 401(k)s and IRAs have annual caps.
All of this is to say, you need to invest in the “right” account to optimize your returns. Taxable accounts may be a good place to park your investments that typically lose less of their returns to taxes or for money that you need in the next few years or decade. Conversely, investments with the potential to lose more of their returns to taxes or those that you plan to hold for the very long term may be better suited for tax-advantaged accounts.
Most brokerages (but not all) offer both types of investment accounts, so make sure your company of choice has the account type you need. If yours doesn’t or you’re just starting your investing journey, check out Forbes Advisor’s list of the best brokerages to find the right choice for you.
The Bottom Line
If you want to make money in stocks, you don’t have to spend your days speculating on which individual companies’ stocks may go up or down in the short term. In fact, even the most successful investors, like Warren Buffett, recommend people invest in low-cost index funds and hold onto them for the years or decades until they need their money.
The tried-and-true key to successful investing, then, is unfortunately a little boring. Simply have patience that diversified investments, like index funds, will pay off over the long term, instead of chasing the latest hot stock.
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How to Make Money in Stocks
To make money in stocks, stay invested
The key to making money in stocks is remaining in the stock market. Your length of “time in the market” is the best predictor of your total performance.
The stock market’s average return is a cool 10% annually — better than you can find in a bank account or bonds. 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.
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Most financial advisors will tell you that you should invest only money that you won't need for at least five years. That way, you have time to ride out market ups and downs and still make money.
The more time you're invested in the market, the more opportunity there is for your investments to go up. The best companies tend to increase their profits over time, and investors reward these greater earnings with a higher stock price. That higher price translates into a return for investors who own the stock.
» First things first. You’ll need a brokerage account before you can start investing. Here’s how to open one — it only takes about 15 minutes.
More time in the market also allows you to collect dividends, if the company pays them. If you’re trading in and out of the market on a daily, weekly or monthly basis, you can kiss those dividends goodbye because you likely won’t own the stock at the critical points on the calendar to capture the payouts.
The longer you’re in, the closer you’ll get to that historical average annual return of 10%.
» Explore our list of the best brokers for stock trading
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Index funds or individual stocks?
If that 10% annual return sounds good to you, then the place to invest is in an index fund. Index funds comprise dozens or even hundreds of stocks that mirror an index such as the S&P 500, so you need little knowledge about individual companies to succeed. The main driver of success, again, is the discipline to stay invested.
Yes, you potentially can earn much higher returns in individual stocks than in an index fund, but you’ll need to put some sweat into researching companies to earn it.
» Learn more: Read our full explainer on stocks vs. funds
Three excuses that keep you from making money investing
The stock market is the only market where the goods go on sale and everyone becomes too afraid to buy. That may sound silly, but it’s exactly what happens when the market dips even a few percent, as it often does. Investors become scared and sell in a panic. Yet when prices rise, investors plunge in headlong. It’s a perfect recipe for “buying high and selling low.”
To avoid both of these extremes, investors have to understand the typical lies they tell themselves. Here are three of the biggest:
1. 'I’ll wait until the stock market is safe to invest.'
This excuse is used by investors after stocks have declined, when they’re too afraid to buy into the market. Maybe stocks have been declining a few days in a row or perhaps they’ve been on a long-term decline. But when investors say they're waiting for it to be safe, they mean they’re waiting for prices to climb. So waiting for (the perception of) safety is just a way to end up paying higher prices, and indeed it is often merely a perception of safety that investors are paying for.
What drives this behavior: Fear is the guiding emotion, but psychologists call this more specific behavior "loss aversion." That is, investors would rather avoid a short-term loss at any cost than achieve a longer-term gain. So when you feel pain at losing money, you’re likely to do anything to stop that hurt. So you sell stocks or don’t buy even when prices are cheap.
2. 'I’ll buy back in next week when it’s lower.'
This excuse is used by would-be buyers as they wait for the stock to drop. But investors never know which way stocks will move on any given day, especially in the short term. A stock or market could just as easily rise as fall next week. Smart investors buy stocks when they’re cheap and hold them over time.
What drives this behavior: It could be fear or greed. The fearful investor may worry the stock is going to fall before next week and waits, while the greedy investor expects a fall but wants to try to get a much better price than today’s.
3. 'I’m bored of this stock, so I’m selling.'
This excuse is used by investors who need excitement from their investments, like action in a casino. But smart investing is actually boring. The best investors sit on their stocks for years and years, letting them compound gains. Investing is not a quick-hit game, usually. All the gains come while you wait, not while you’re trading in and out of the market.
What drives this behavior: an investor’s desire for excitement. That desire may be fueled by the misguided notion that successful investors are trading every day to earn big gains. While some traders do successfully do this, even they are ruthlessly and rationally focused on the outcome. For them, it’s not about excitement but rather making money, so they avoid emotional decision-making.
» Access stock research: Read our review of Morningstar
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Investing in a stocks and shares ISA means taking some risk with your money in the expectation that it will grow faster.
While a cash ISA may seem the safest option of the two, the rising cost of living will be eroding the value of your pot if the interest you are earning is eclipsed by the rate of inflation.
In this article, we explain:
Related content: What is a cash ISA?
Why have cash ISAs become less popular?
Cash ISAs have waned in popularity over recent years with a record £7bn being pulled out of the accounts by frustrated savers in the last six months of 2021, according to AJ Bell. There are a number of reasons for this, including:
Reasons to use a cash ISA
Cash ISAs and stocks and shares ISAs both offer tax-efficient ways to save and invest your money, but the later can look more appealing in a high inflation, low interest rate environment.
However there are still good reasons to use a cash ISA depending on your personal circumstances:
- Easy to open and simple to understand
- Good if you need access to your money in the next 5 years
- Interest earned is tax-free – you may not be earning over £1000 in interest now (the current PSA allowance for basic-rate taxpayers) but you could in the future
- Good for higher earners who do not benefit from the PSA at all
- Your money is protected up to £85,000 per financial institution
- Protects against tax policy changes in the future
- When you die, your spouse or civil partner can inherit your ISA without it affecting their own allowance
- There are different types of cash ISAs to choose from that may be better suited to your needs
- An easy access ISA is a good place to hold your emergency savings pot
You can read more about whether a cash ISA is worth it here.
Reasons to use a stocks and shares ISA
If you have a longer time frame, around five years or more, you may want to consider a stocks and shares ISA.
While you are taking on a degree of risk with investing, money is a cash ISA will be losing money over the long-term if the interest rate on the account doesn’t keep up with the rate of inflation.
At the moment there is currently no cash savings account paying anywhere near the current rate of inflation.
- Easy to open and simple to understand
- Any growth or income generated within an ISA is protected from tax
- A good way to start investing your money
- Investments are protected up to £85,000 per financial institution should your provider collapse. NOTE: This does not cover losses from your actual investments
- A better chance of beating inflation than if you left your money in a cash ISA or cash savings account
- You can put up to £20,000 in each tax year
- You can invest in a wide range of potential investments with tax benefits within a stocks and shares ISA, e.g.
- Shares
- Government and corporate bonds
- Funds or investment trusts
Although stocks and shares ISAs carry a risk that you might not get your original investment back, as with all investing, they can offer considerably higher returns over time if you take a longer term view.
Stock markets go up and down. But the longer you stay invested the more time you have to make back any losses and over the medium to long term you have a good chance of making money.
Find out more in about these types of ISAs in our guide: Everything you need to know about stocks and shares ISAs
Which ISA is right for me?
ISAs work best when you pick the right one for your savings goal. Take this short survey to find out which ISA is right for you.
- It only takes a couple of minutes
- No personal details required
Should I choose a cash ISA or a stocks and shares ISA?
You don’t need to choose between opening a cash ISA or a stocks and shares ISA – you can open both if you want.
Each tax year you are allowed to pay into one type of each ISA but not two of the same type, e.g. two cash ISAs. So there is nothing stopping you opening a cash and a stocks and shares ISA and splitting your £20,000 allowance between the two.
Having an emergency pot or cash savings in an easy access cash ISA or savings account is essential in case something goes wrong short term, like the car breaks down.
The recommendation is three to six months worth of outgoings. Shop around for an account that pays the highest rate of interest.
Beyond this amount of money and you may want to start looking at alternatives like stocks and shares ISAs. You need to consider your:
- financial goals
- personal circumstances
- timeframe
- attitude to risk
Remember investing is for the long term. If you know you will need the cash in the next few years, perhaps to get married or buy a house, then a cash ISA may be the best option for you.
What do we mean by risk?
Risk refers to the potential for you to permanently lose some or all of the money you have invested due to one or more factors going against them.
It tends to be the case that the more risk you are willing to take, the higher the potential returns – but also the higher the chances that you could lose everything.
Some of the key risks present in investing are:
- Market risk – the potential for your investment to fall in value due to adverse economic events that affect the entire stock market.
- Inflation risk – that savings or investments won’t keep up with inflation.
- Default risk – that a company is no longer able to repay its debt to you.
- Liquidity risk – you may not be able to withdraw and liquidate your investment when you need to or would have to accept a much lower price to do so.
- Longevity risk – that you ‘outlive’ your investments and effectively run out of funds to live on.
What to consider when deciding your appetite for risk:
- Timeline: Only invest money that you don’t need for at least the next five years. The longer you can stay in the market the better, to ride out periods of volatility.
- Financial need: Never invest money you can’t afford to lose. Ensure first that you have a good safety net of savings available to you should you need it.
- Capacity for loss: This is your ability to deal with falls in the value of your investments and the impact on your standard of living.
- Investment goals: For example, are you wanting to pay off debts, fund school fees, or provide a retirement income?
The key, as all good investors will tell you, is diversification; don’t put all your eggs in one basket.
To lower the risk of losing money with your stocks and shares ISA, it is important to select a mix of assets across different sectors and geographies.
You can choose a ready-made portfolios with stocks and shares ISA, which invests in funds chosen by a investment management firm.
Or you can pick your investments yourself using a self-invested stocks and shares ISA.
What is a low risk investment?
No single asset class can be relied upon to always produce safe, reliable and consistent returns, says Kat Mann at Nutmeg, which is why diversification is so important.
Bonds and cash are likely to have lower returns than company shares but have a tendency to remain more stable.
- For a better chance of higher returns – consider more to invest in your stocks and shares ISA
- If you want steady growth, consider more bonds
- For low risk but virtually no returns, hold cash.
An independent financial adviser can:
- suggest good fund managers to invest in
- help you judge your capacity to withstand loss
- assess your individual circumstances and any tax benefits
- give you a more rounded understanding of what risk levels you can take
If you are unsure about investing or what to do with your money, it might be worth speaking to a professional. Check out our article: How much does financial advice cost – and is it worth it?
The answer to that is a resounding, "Yes."
While there are plenty of ways you can make money fast by doing odd jobs or generating it through things like affiliate marketing or email marketing, actually making money by investing with just $1,000 might present more challenges, and frankly, more risks. That is, of course, unless you know what you're doing.
However, all risks aside, even if you're living paycheck-to-paycheck, you still may be able to conjure up $1,000 to put towards an investment if you're creative.
Before you dive in, there are some mindset principles that you need to adhere to. Moving beyond the scarcity mentality is crucial. Too many of us live our lives with the notion that there's never enough of things to go around -- that we don't have enough time, money, connections or opportunities to grow and live life at a higher level.
That's just a belief system. Think and you shall become. If you think you can't get rich or even make a sizable amount of money by investing it into lucrative short-term investment vehicles, then it's much more of a mindset issue than anything else. You don't need to invest a lot of money with any of the following strategies.
Sure, having more money to invest would be ideal. But it's not necessary. As long as you can identify the right strategy that works for you, all you need to do is scale. It's similar to building an offer online, identifying the right conversion rate through optimization, then scaling that out. If you know you can invest a dollar and make two dollars, you'll continue to invest a dollar.
Start small. Try different methods. Track and analyze your results. Don't get so caught up on how you're going to get wildly rich overnight. That won't happen. But if you can leverage one of the following methods to make money by investing small, short bursts of capital, then all you have to do is scale -- plain and simple. You don't have to overthink it.
Related: 13 Easy Investing Apps and Websites for Millennials
How to invest $1,000 to make money fast
If you have $1,000 to invest, you can make money a variety of ways. But there are some methods that trump others. The play here is speed. We're not talking about long-term, buy-hold strategies. Those are terrific if you're looking to invest your capital over at least a two- to five-year period. We're talking about ways you can make money fast.
Even when it comes to markets that might take time to move or have longer cycles, investments can often turn into realized profits and quick gains by leveraging the right strategies. What's the right strategy? Sure, long-term works. Real estate and other time-intensive strategies will eventually get you there.
Raghee Horner of Simpler Futures says that "long-term interest rates are the next big trade," while Jim Cramer of Mad Money says that "there are tons of people who are late to trends by nature and adopt a trend after it's no longer in fashion." By jumping in and out of long-term investments like that, you're far more likely to lose your shirt than if you time your short-term plays just right.
It's not so much about trying to catch the latest trend. It's not about becoming a webinar guru like Jason Fladlien or Liz Benny -- or even building out sales funnels or optimizing your conversions. Investing your money is more about paying careful attention to indicators that can really move the needle in the short-term as opposed to the longer term. It's also about leveraging and hedging your investments the right way without putting too much risk on the line.
That doesn't mean that you don't need a long-term strategy. You definitely do. But if you're looking to create some momentum and generate some capital quickly, in the near-term, then the following investment strategies might help you do just that.
1. Play the stock market.
Day trading is not for the faint of heart. It takes grit and determination. It takes understanding the different market forces at play. This isn't something intended for amateurs. But, if learned and learned well, it is a way where you can quickly -- within the span of hours -- make a significant amount of money with a relatively small investment.
There are also ways to hedge your bets when it comes to playing the stock market. Whether you play the general market or you trade penny stocks, ensure that you set stop-loss limits to cut any potential for significant depreciations. Now, if you're an advanced trader, you likely understand that market makers often move stocks to play into either our fear of failure or our greed. And they'll often push a stock down to a certain price to enhance that fear and play right into their pockets.
When it comes to penny stocks, this is further exaggerated. So you have to understand what you're doing and be able to analyze the market forces and make significant gains. Pay attention to moving averages. Often, when stocks break through 200-day moving averages, there's potential for either large upside or big downside.
Related: What's a Cause of Stock Market Crashes? Too Much Testosterone, Science Says.
2. Invest in a money-making course.
Investing in yourself is one of the best possible investments you can make. While you might not be able to pinpoint an actualized return on investment, there's no money that's better spent. Invest in yourself. Invest in your education. Learn. Adapt. Grow. Discover what you're passionate about.
There are loads of money-making courses on the internet. The hard part is choosing the right one. From ebooks to social media marketing, search engine optimization and beyond, the possibilities are endless. While many money-making gurus might pop up on social media, not all courses are created alike. Spend time doing your due diligence and research to choose the one that's right for you.
Related: Mark Cuban's 3 'Smart Money Moves Everyone Should Make'
3. Trade commodities.
Trading commodities like gold and silver present a rare opportunity, especially when they're trading at the lower end of their five-year range. Metrics like that give a strong indication on where commodities might be heading. Carolyn Boroden of Fibonacci Queen says, "I have long-term support and timing in the silver markets because silver is a solid hedge on inflation. Plus, commodities like silver are tangible assets that people can hold onto."
The fundamentals of economics drives the price of commodities. As supply dips, demand increases and prices rise. Any disruption to a supply chain has a severe impact on prices. For example, a health scare to livestock can significantly alter prices as scarcity reins free. However, livestock and meat are just one form of commodities.
Metals, energy and agriculture are other types of commodities. To invest, you can use an exchange like the London Metal Exchange or the Chicago Mercantile Exchange, as well as many others. Often, investing in commodities means investing in futures contracts. Effectively, that's a pre-arranged agreement to buy a specific quantity at a specific price in the future. These are leveraged contracts, providing both big upside and a potential for large downside, so exercise caution.
Related: What Starbucks Teaches About Marketing Commodity Products
4. Trade cryptocurrencies.
Cryptocurrencies are on the rise. While trading them might seem risky, if you hedge your bets here as well, you could limit some fallout from a poorly-timed trade. There are plenty of platforms for trading cryptocurrencies as well. But before you dive in, educate yourself. Find courses on platforms like Udemy, Kajabi or Teachable. And learn the intricacies of trading things like Bitcoin, Ether, Litecoin and others.
While there are over 3,000 cryptocurrencies in existence, only a handful really matter today. Find an exchange, research the trading patterns, look for breakouts of long-term moving averages and get busy trading. You can use exchanges like Coinbase, Kraken or Cex.io, along with many others, to make the actual trades.
Related: 6 Cryptocurrencies You Should Know About (and None of Them Are Bitcoin)
5. Use peer-to-peer lending.
Peer-to-peer lending is a hot investment vehicle these days. While you might not get rich investing in a peer-to-peer lending network, you could definitely make a bit of coin. Which lending platform do you use? Today, there are many to choose from, but the most popular ones include Lending Club, Peer Form and Prosper.
How does this work? Peer-to-peer lending platforms allow you to give small bursts of capital to businesses or individuals while collecting an interest rate on the return. You get more money than you would if you placed it in a savings account, plus your risk is limited because the algorithms are doing much of the work for you.
Once you identify the offer, you can dig in and do some research -- then, you can either take the deal or not. You'll have your risk evaluated based on a proprietary algorithm that includes employment and credit history, and you'll be able to make the decision to invest based on a variety of well-thought-out data.
Related: Why Peer-to-Peer Lending Could Be a Good Investment Choice
6. Trade options.
When it comes to options, Tom Sosnoff at Tastyworks says, "Trade small and trade often." What type should you trade? There are loads of vehicles, such as FOREX and stocks. The best way to make money by investing when it comes to options is to jump in at around 15 days before corporate earnings are released. What type should you buy? Money calls.
The optimal time to sell those money calls is the day before the company releases its earnings. There's just so much excitement and anticipation around earnings that it typically drives up the price, giving you a consistent winner. But don't hold through the earnings. That's a gamble you don't want to take if you're not a seasoned investor, says John Carter from Simpler Trading.
Related: 2 Strategies for Making Money Day Trading With a Bit Less Risk
7. Flip real estate contracts.
Making money with real estate might seem like a long-term prospect, but it's not. There are ways you can take as little as $500 to $1,000 and invest it in flipping real estate contracts to make money fast. How? Use a system like Kent Clothier's REWW to first understand how the market works. It'll then provide you with the data and tools to identify vacant homes, distressed sellers and cash buyers.
While most people think that real estate is won by flipping traditional homes and doing the renovations yourself, the fastest money you can make in real estate involves flipping the actual contract itself. It's arbitrage. Identify the motivated sellers and cash buyers, bring them together and effectively broker the deal. It might seem odd on the first go, but once you get the hang of it, you can become a mini-mogul in the real estate industry by simply scaling out this one single strategy. It works, and it's touted by some of the world's most successful real estate investors.
Kristin Duvall 
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