Earning doesn’t make you rich. Saving doesn’t make you rich. Investing is what will make you rich. The wealthy know this truth. They know that through a deliberate strategy and consistent investments, you can get rich off stocks.
Learning how to get rich off stocks is a skill that can change the trajectory of your life. One of the best passive income streams (please hyperlink the other article), stock market investments can help you earn disproportionate results and significantly improve your financial net worth.
In this guide to stock market wealth creation, we will explain how you can get rich off stocks and live the life of your dreams. But first, let’s answer the big question.
Can you get rich off stocks?
Yes, you can. By identifying stocks with growth potential, doing your due diligence, and holding onto high-value stocks, you can get rich off stocks.
With a network of around $97 billion, Warren Buffet is one of the most successful investors on the planet. In 1971, he bought See’s Candies, a California-based company that produces candies and chocolates, for $25 million. Now the company’s annual revenues are close to $400 million.
Buffet also saw potential in Apple, American Express, and Moody’s long before others. All these stocks have given him and his company, Berkshire Hathaway, exceptional returns.
So, you can get rich off stocks. To do that, you need a strong strategy customized to your unique needs. You also need to know your bandwidth and investment options and have a timeline for when to enter and exit investments. Use the following steps, and you will increase your odds of making money off the stock market.
Create your investing budget
You don’t need a lot of money to get started in the stock market. But you do need some. And the earlier you start allocating money for investments, the better off you will be. This needs a strategy if you have never done it before.
The easiest way to do it is by auto-deducting money from your income into a special fund meant for investing. You can start contributing small amounts and increase them according to your bandwidth.
Before creating an investing budget, you should identify your larger financial goals. What are your liabilities and assets now? How much money do you need to set aside for major life events? What’s the amount you need for a comfortable retirement? These will help shape your financial decisions.
A budget will show you how much you have been able to contribute over a period. This brings in accountability. Instead of saying, “I will start investing someday,” now you have a concrete plan of action with the necessary resources.
Identify your investing strategy
Your strategy will tell you whether you should make a particular investment or not. This helps you avoid impulsive and tentative decisions. The two most common investing strategies are fundamental analysis and technical analysis. You can use either or a combination of the two.
In fundamental analysis, you look at the intrinsic value of a stock. You might discover stocks that you believe have strong potential but are currently undervalued. If so, you have an opportunity to make a long-term investment and wait for the stock to match its true value.
Fundamental analysis uses metrics, such as the price-to-earnings ratio, debt-to-equity ratio, and free cash flow, to help unearth a stock’s fundamental value. Long-term investors use fundamental analysis to get rich off stocks.
Technical analysis is about evaluating market trends and patterns. Here, analysts look at past performance, momentum indicators, simple moving averages, etc. This is what day traders use for short-term investments.
In technical analysis, the focus is on the current market price rather than whether the stock is at its right price. Thousands of retail investors have made immense returns through meme stocks like GameStop using technical analysis.
Pick an investing style
Once you know your investing strategy, it’s time to figure out your style between active and passive investing. Actively managed funds are run by professional money managers with domain expertise and experience. They will handle some of your investment responsibility.
Considering the skills they bring to the table, these are costlier than passively managed funds. Passively managed funds are cheaper, but they can still get you high returns. The next decision is how aggressively you want to invest.
If you start early, you can be more ambitious in your investments since your risk appetite will be higher. But remember that how much money you can invest and the stocks you pick should be based on your financial goals and current investment bandwidth.
Whatever style you choose, always focus on the long term. To get rich off stocks, you need the power of compounding, which happens when you hold onto value stocks over a longer horizon. While some of your trades could be in the short term, a significant portion should be earmarked for the long term.
Do your research
Those who consistently get rich off stocks do extensive research before making any investment decisions. There are several aspects of market research that you need to focus on to ensure that you get the category, company, and timing right.
Read financial newspapers and websites regularly to know which sectors or firms have high growth potential. This will require you to go beyond the headlines and look for reports about emerging industries, technologies, and consumer behaviors.
For short-term trades, remember that by the time a stock’s price rise is mentioned in the media, it may have already gained a lot. What you want is to get in before the price takes off. If it’s a long-term investment, you don’t have to worry about the daily, weekly, or monthly price fluctuations if you believe in the fundamentals of the company.
Market data will help you make optimal investment decisions. This data includes market volume, dividend per share (if applicable), bid/ask quotes and other information. There is both real-time data and historical data that you can use to identify potential high performers.
Maximize profits
This might seem like an obvious statement, but there’s a greater truth to it. Usually, investment advice harps on diversification or the need to spread your investments across stocks with varying risks. This strategy helps you minimize losses. What you also need is a framework for maximizing your profits.
Don’t spread your investments equally across stocks. This is how you get average or below-average returns. Identify stocks with the highest potential in your investment portfolio. Look at the market data and conduct research on the category, company, competitors, and customer growth. If there is sufficient cash flow with limited downsides, you should increase your investments in these stocks.
If a stock begins to lose its market value and your research suggests that its future is bleak, you should exit as early as possible. Reinvest whatever money you get into those with better potential. This ensures that you will get disproportionately higher returns from those stocks.
Savvy investors know that not all their stocks will perform well or beat the market. Most will produce average returns, and some might do well for a while. But these investors also know that a minority of their stock picks will outperform the rest. What you should do is invest more in these stocks.
Reinvest your dividends
Many companies give periodic payments in the form of dividends to their shareholders. The amounts might seem negligible, especially when you’re starting out. But reinvesting these small amounts can help compound your investment and generate high returns.
When you reinvest your dividends, you’re buying additional stocks in the company. This helps both your earnings and returns compound faster. This is the primary reason most experts advise investors to not let their dividends go to waste.
This strategy of doubling down on your investments works exceptionally well in the long run. The better news is that most brokerage firms now have an option whereby your dividends get automatically reinvested if you sign up for the feature.
Select the right investment account
The investment account you choose will determine the taxes you pay on gains or income. You can get tax advantages from certain investment accounts, including deferred tax-free withdrawals. Then, there are traditional investment accounts with tax deductions.
Conventional investment accounts don’t come with tax incentives, but they give you the freedom to withdraw your money whenever you need it. This helps you have access to funds when you need to invest in a promising stock.
Retirement accounts don’t allow early withdrawals. If you have to take out your money, there could be a 10% penalty plus taxes you might owe. Along with tax incentives, you should also look for analyses, reports, and real-time news and insights from your investment account.
In short
Investing in the stock market is one of the most proven ways to build your wealth. As this guide shows, to get rich off stocks, you need to start early, be consistent and disciplined, and stay in it for the long term. That’s when all your strategies will compound to give you substantial returns.