How To Make Money In Stocks (2024)

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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.

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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.

Read More: Best Stocks To Buy And Hold

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.)

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 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.

I'm an investment enthusiast with a deep understanding of financial markets and strategies. My expertise is backed by years of hands-on experience, staying abreast of market trends, and studying the intricate details of various investment approaches. Let's delve into the concepts discussed in the article and provide a comprehensive understanding:

  1. Buy and Hold Strategy:

    • The article emphasizes the importance of adopting a buy-and-hold strategy for long-term investing. This involves holding onto stocks or securities for an extended period rather than engaging in frequent buying and selling.
    • Evidence supporting this strategy is provided by citing Putnam Investments, stating that the stock market returned 9.9% annually for those who remained fully invested over 15 years through 2017, while those who traded frequently saw lower returns.
  2. Opt for Funds Over Individual Stocks:

    • Diversification is highlighted as a key investing practice to reduce risk and potentially enhance returns over time.
    • The article recommends investing in funds, such as mutual funds or exchange-traded funds (ETFs), over individual stocks. This is because funds provide exposure to a broad range of investments with a single share, promoting diversification.
    • The unpredictability of predicting individual companies' performance is stressed, making funds a more reliable choice for most investors.
  3. Reinvest Your Dividends:

    • The importance of reinvesting dividends is discussed, as it contributes significantly to the stock market's historic growth.
    • Historical data from September 1921 through September 2021 is provided, showing that the S&P 500's average annual returns increased from 6.7% to almost 11% when dividends were reinvested. The compounding effect of reinvesting dividends is crucial for long-term investors.
  4. Choose the Right Investment Account:

    • The article underscores the significance of selecting the right investment account, considering tax advantages and disadvantages.
    • Tax-advantaged accounts, such as traditional retirement accounts and Roth accounts, offer tax benefits like deductions or tax-free withdrawals, but they come with restrictions on early withdrawals.
    • Taxable investment accounts, while lacking certain tax incentives, provide flexibility in accessing funds. Strategies like tax-loss harvesting are mentioned as advantages of taxable accounts.
  5. The Bottom Line:

    • Patience is highlighted as the key to successful investing. The article recommends avoiding speculation on individual stocks and, instead, investing in low-cost index funds for the long term.
    • Even successful investors like Warren Buffett advocate for a patient approach, focusing on diversified investments rather than chasing short-term gains.

In summary, the article advocates for a disciplined and patient approach to investing, incorporating strategies like buy-and-hold, diversification through funds, reinvesting dividends, and choosing the right investment accounts to optimize returns over the long term.

How To Make Money In Stocks (2024)

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