It is easy to make money on stocks and anyone can do it. You do not have to be familiar with the market or spend a lot of time analyzing stocks to be able to make money. It is possible to make money with very little effort.
With that said, I have come up with my top ways on how you can become successful in the stock market.
So, how do you become successful in the stock market?
You do not have to be a professional to make money on stocks. In fact, the easiest way to become successful in the stock market is to make money as a long-term shareholder.
If you buy a diversified portfolio of shares in companies listed on the large companies list, that have historically performed well then you will receive a good return on your money without having to know much about shares.
Why should you trade stocks?
There is a big reason why so many people trade in stocks – you have a belief that you can make money on the investment.
Stock trading is an alternative to e.g. to have the money in a savings account, and the big draw is that you can get a greater return, that is, to earn more, if you choose to buy shares than to have the money in a savings account.
Another saving method is to save in mutual funds, or to save in both shares and mutual funds.
It should be remembered that there is a different degree of risk associated with the different forms of savings, where stock trading has a high risk compared with a savings account.
Are there any risks with stock trading?
Stock trading is associated with relatively high risk and you may lose the money you have invested.
The higher risk means that your return can be much greater than if you were to invest in a savings alternative with a lower risk, but at the same time the risk of losing your investment increases.
Why do shares rise in value?
There can be many different reasons why shares rise in value – in fact anything that can have an impact on the company’s future profits.
In the long term, the main reason why shares rise in value is that a share is an ownership interest in a company, and that you as a partner in a company have the right to share in the company’s profits.
All companies traded on a stock exchange aim to make a profit and make money.
When companies make a profit and make money, the value of them also increases, and then you as a shareholder make money.
However, it is not only today’s profits that come into play, but also the expectations of a company’s future profits.
As mentioned, you as a shareholder can make money by increasing the value of the company. But you can also make money if the company chooses to distribute all or part of the profits to its shareholders through dividends.
This means that they pay money to their shareholders.
From the shorter time perspective, the prices are affected by more temporary reasons.
These can be, for example, prevailing general trends upwards or downwards, interim results, rumors that are true or false, temporary interest rate changes, temporary fluctuations in the number of people who want to buy or sell shares, news and much more.
In new hot industries, there is also a buying hysteria which can create short-term bubbles.
How do you make money on the stock market?
There are two different ways to make money by investing in stocks:
- By buying shares that go up in value and then selling them at a higher price.
- By receiving dividends from the company
Feeling unsure which stocks to pick? Then check out this video I found on Youtube:
1. How to make money on price increases?
Each share has a price that you pay on the market, this is what someone right now is willing to sell the share for. If the company grows and increases its profits, the share price tends to rise accordingly.
There is a difference between price and value.
When you buy a share, you pay a price, in the Volvo example $6.18, but what the share represents is the value.
We will talk more about the value of shares and from the analysis in the advanced part, but keep in mind already now that the price says nothing about how cheap a share is.
If a share costs $1 a share or $25 a share, the price is only and does not say how expensive or cheap a share is, but the value of the company that the share represents says everything about how cheap / expensive the share price is.
Buy shares in companies that you understand and want to own because you believe in their product or service.
Let’s say you buy Volvo at the beginning of January 2010 and it costs 6.18 for one share (1st Jan 2010).
If you then sold five years later in January 2015, the price was SEK 9.69 (31 Jan 2015). Then your Volvo shares would have increased in price by about 57%
2. How do you earn on dividends?
As a shareholder, you have the right to take part in any profits that are created.
This profit can sometimes be distributed in full or in part to the shareholders. A dividend simply means that you as a shareholder receive money in your account.
Not all companies have a dividend, but the most common are among the larger companies that have been around for a while and make big profits.
If you buy smaller companies, you believe more in its ability to grow and make a profit in the future.
How much a company distributes in relation to the share price is usually called a direct return. The higher the direct return, the more dividend you get.
Keep in mind that dividends are money that disappears from the company to the shareholders’ accounts, so the more that is distributed, the less is left in the company to invest for the future.
Do not choose a stock just because it has a high direct return, but choose because you believe in the company and like their product or service and that the company can afford to pay dividends also in the future
Should I buy shares?
This question is very difficult to answer without knowing more about your finances and I never recommend that anyone buy shares.
I try to give everyone the pros and cons of buying stocks.
It is then up to you to decide if they want to buy shares or not. That being said, stocks can be a very good option if you choose large stable companies with a long history.
I advise against investing the money in so-called hope companies or other high-risk stocks.
However, there may be better alternatives than investing in stocks.
Do you have e.g. SMS loans, private loans or consumer loans with high interest rates or high fees.
If you have it, it may be better to pay off your loans instead of investing in stocks. This gives a higher, 100% risk-free return.
Let us e.g. say you have a loan with 8% interest.
If you pay off that loan, you get the equivalent of an 8% return on your money. This is because you do not have to pay interest and a saved dollar is worth as much as a earned dollar.
If you e.g. has $10.000 in debt with 8% interest, it will cost $10.800 in one year to pay off that loan.
In other words, if you invest $10.000 in shares, they must be worth more than $10.800 in a year for it to be a better alternative than paying off the loan.
It is usually better to pay off the loan if the interest rate is higher than 5%.
Check out this video for a better explanation on the topic of compound intrest:
You should also avoid buying stocks if you need the money for the next two years.
That is all and I wish you the very best on your investment journey, good luck 🙂