If you are thinking about investing money to make money fast in 2021, this is the right article for you because this article covers how people make money with stocks and how you can too!
Investing in the stock market can seem like a crazy prospect for a generation of young adults with two cents in their pocket and a $100,000 student loan for a degree that they don’t use. But when it’s done right, you can take that 2 cents turn it into 3 cents, and well, that’s more than you had yesterday, and isn’t that the goal? In all seriousness, the stock market is often perceived as a big scary abyss of money that eats unsuspecting investors alive and is the path to a magnitude of wealth for those that understand it. At the same time, those perceptions can adequately understand the stock market, and succeeding and making money with it is far easier than you might expect.
What is the Stock Market?
The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations.
There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities. While both terms – stock market and stock exchange – are used interchangeably, the latter term is generally a subset of the former. If one says that she trades in the stock market, it means that she buys and sells shares/equities on one (or more) of the stock exchange(s) that are part of the overall stock market.
The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), NASDAQ, and the Chicago Board Options Exchange (CBOE). These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U.S.
Though it is called a stock market or equity market and is primarily known for trading stocks/equities, other financial securities – like exchange traded funds (ETF), corporate bonds and derivatives based on stocks, commodities, currencies.
Understanding the Stock Market
While today it is possible to purchase almost everything online, there is usually a designated market for every commodity. For instance, people drive to city outskirts and farmlands to purchase Christmas trees, visit the local timber market to buy wood and other necessary material for home furniture and renovations, and go to stores like Walmart for their regular grocery supplies. Such dedicated markets serve as a platform where numerous buyers and sellers meet, interact and transact.
Since the number of market participants is huge, one is assured of a fair price. For example, if there is only one seller of Christmas trees in the entire city, he will have the liberty to charge any price he pleases as the buyers won’t have anywhere else to go. If the number of tree sellers is large in a common marketplace, they will have to compete against each other to attract buyers. The buyers will be spoiled for choice with low- or optimum-pricing making it a fair market with price transparency.
Even while shopping online, buyers compare prices offered by different sellers on the same shopping portal or across different portals to get the best deals, forcing the various online sellers to offer the best price. A stock market is a similar designated market for trading various kinds of securities in a controlled, secure and managed environment. Since the stock market brings together hundreds of thousands of market participants who wish to buy and sell shares, it ensures fair pricing practices and transparency in transactions.
While earlier stock markets used to issue and deal in paper-based physical share certificates, the modern day computer-aided stock markets operate electronically.
How the Stock Market Works
In a nutshell, stock markets provide a secure and regulated environment where market participants can transact in shares and other eligible financial instruments with confidence with zero- to low-operational risk. Operating under the defined rules as stated by the regulator, the stock markets act as primary markets and as secondary markets.
As a primary market, the stock market allows companies to issue and sell their shares to the common public for the first time through the process of initial public offerings (IPO). This activity helps companies raise necessary capital from investors. It essentially means that a company divides itself into a number of shares (say, 20 million shares) and sells a part of those shares (say, 5 million shares) to common public at a price (say, $10 per share).
To facilitate this process, a company needs a marketplace where these shares can be sold. This marketplace is provided by the stock market. If everything goes as per the plans, the company will successfully sell the 5 million shares at a price of $10 per share and collect $50 million worth of funds.
Investors will get the company shares which they can expect to hold for their preferred duration, in anticipation of rising in share price and any potential income in the form of dividend payments. The stock exchange acts as a facilitator for this capital raising process and receives a fee for its services from the company and its financial partners.
Functions of a Stock Market
A stock market primarily serves the following functions:
Fair Dealing in Securities Transactions: Depending on the standard rules of demand and supply, the stock exchange needs to ensure that all interested market participants have instant access to data for all buy and sell orders thereby helping in the fair and transparent pricing of securities. Additionally, it should also perform efficient matching of appropriate buy and sell orders.
For example, there may be three buyers who have placed orders for buying Microsoft shares at $100, $105 and $110, and there may be four sellers who are willing to sell Microsoft shares at $110, $112, $115 and $120. The exchange (through their computer operated automated trading systems) needs to ensure that the best buy and best sell are matched, which in this case is at $110 for the given quantity of trade.
Efficient Price Discovery: Stock markets need to support an efficient mechanism for price discovery, which refers to the act of deciding the proper price of a security and is usually performed by assessing market supply and demand and other factors associated with the transactions.
Say, a U.S.-based software company is trading at a price of $100 and has a market capitalization of $5 billion. A news item comes in that the EU regulator has imposed a fine of $2 billion on the company which essentially means that 40 percent of the company’s value may be wiped out. While the stock market may have imposed a trading price range of $90 and $110 on the company’s share price, it should efficiently change the permissible trading price limit to accommodate for the possible changes in the share price, else shareholders may struggle to trade at a fair price.
Liquidity Maintenance: While getting the number of buyers and sellers for a particular financial security are out of control for the stock market, it needs to ensure that whosoever is qualified and willing to trade gets instant access to place orders which should get executed at the fair price.
Security and Validity of Transactions: While more participants are important for efficient working of a market, the same market needs to ensure that all participants are verified and remain compliant with the necessary rules and regulations, leaving no room for default by any of the parties. Additionally, it should ensure that all associated entities operating in the market must also adhere to the rules, and work within the legal framework given by the regulator.
Support All Eligible Types of Participants: A marketplace is made by a variety of participants, which include market makers, investors, traders, speculators, and hedgers. All these participants operate in the stock market with different roles and functions. For instance, an investor may buy stocks and hold them for long term spanning many years, while a trader may enter and exit a position within seconds. A market maker provides necessary liquidity in the market, while a hedger may like to trade in derivatives for mitigating the risk involved in investments. The stock market should ensure that all such participants are able to operate seamlessly fulfilling their desired roles to ensure the market continues to operate efficiently.
Investor Protection: Along with wealthy and institutional investors, a very large number of small investors are also served by the stock market for their small amount of investments. These investors may have limited financial knowledge, and may not be fully aware of the pitfalls of investing in stocks and other listed instruments. The stock exchange must implement necessary measures to offer the necessary protection to such investors to shield them from financial loss and ensure customer trust.
To make money investing in stocks, stay invested.
More time equals more opportunity 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.
If that’s not convincing, consider this. Over the 15 years through 2017, the market returned 9.9% annually to those who remained fully invested, according to Putnam Investments. However:
- If you missed just the 10 best days in that period, your annual return dropped to 5%.
- If you missed the 20 best days, your annual return dropped to 2%.
- If you missed the 30 best days, you actually lost money (-0.4% annually).
In other words, you would have earned twice as much by staying invested (and you don’t have to monitor the market, either!) for just 10 extra critical days. No one can predict which days those are going to be, however, so investors must stay invested the whole time to capture them.
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
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:
- ‘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 “myopic 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.
- ‘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 as the data from Putnam Investments show, 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.
- ‘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.
MAKING MONEY USING STOCKS
To understand the stock market first, we need to understand just what a stock is. A stock, otherwise known as a share, is a financial token or instrument that signifies ownership of a company in some proportion. If Amazon had 1,000 shares and you bought one share, you would own one 1000th of Amazon.
In reality, Amazon and companies alike have millions of shares, but that sums up the point when you own a stock that means that you own a portion of that company, and as the value of that company increases, so does your stock price.
Common vs Preferred Stocks
There are also common and preferred stocks, which refer to the voting rights of a shareholder. Ordinary shares have voting rights, and preferred shares don’t. When you have voting rights, you can vote on board elections, mergers, and other financial decisions. Preferred shares are called that because they get preference when a company pays a dividend, which is a split of a company’s profit with the shareholder.
Why companies sell stocks?
The next thing you might be wondering is why companies will sell stocks, and that answer is simple to give money. Stocks allow a company to raise massive amounts of operating capital with virtually no extra effort or product. The modern stock market often bases the value of the company on its potential earnings down the line.
This means that relatively small companies can earn millions or even billions if investors think that they can succeed in the future. If a company wants to sell their shares, they need a place to do it. Enter the stock market companies list shares by selling them through an initial public offering or IPO on an exchange. This essentially changes the status of a company from a privately held business to a publicly-traded one.
What are IPOs?
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. IPOs can let company founders cash out their stake or just let the company raise money once a company’s stocks are listed on an exchange. The public can trade them; usually, prices will fluctuate based on public opinion.
Still, the more concrete trends and fluctuations are usually dependent upon a company’s earnings and operations; these can be measured by p/e ratios or price to earnings ratios and a variety of other metrics. This is usually worn casual investors get scared, and their eyes start to glaze over but fear not, it’s not as complicated as it sounds. Next, we need to understand how and why a share price fluctuates.
How and why a share price fluctuates in stock market?
The stock market comprises millions of investors and individual traders who all feel different ways about a company. They all make independent choices, and the net of those choices results in the positive or negative stock movement. If more people buy, then the price has to climb. If everyone wants out of a company, then the price falls due to a lack of purchasing demand.
An example might be this, say you post something on Craigslist for $100. After posting, you get 100 emails saying they’ll come to purchase your item all cash right now. Most people at this point might start thinking that they price their item too low and thus raise the price until, in theory, it reaches the most that the one single last buyer will pay for it conversely if you receive no offers. You’ll likely keep dropping the price until someone bites.
This is similar to how the stock market moves except that the price rise and drop aren’t done consciously, preferably by millions of transactions every second. Supply and demand, which brings us to that topic for every stock purchase or sale, has to be a buyer and a seller. If there are more buyers, then the price will go up. If there are more sellers, the price will go down.
Traders often might talk about the bid-ask spread, which means the difference between the bid or what someone is willing to pay to buy a share and the ask or what someone is willing to sell a share for supply and demand is relatively simple to understand at the end of the day. If more people want something, that thing, in this case, a stock, will be more expensive at the start of stock markets. Matching buyers to sellers was done manually on a trading floor. It’s mostly done automatically by trading systems; this allows the market to move much faster and creates the breakneck pace that any casual onlooker notices when watching the stock market.
Now you might be wondering, well, I don’t have time to understand this, and why should I even invest anyway when I can earn 2 to 3 percent just keeping it in a bank on a high side. The answer is pretty simple if you do it right, you can make a lot of money using a typical example that you might have heard. If you bought one thousand dollars of Amazon stock back in 1997, you’d have roughly 1.5 million dollars today. Now that’s a long investment timeline, but I think most people would agree that the purchase would be worth it.
Other companies often provide return rates like 30 to 70 percent each year, which will build you a lot of wealth compared to that two to three percent each year kept in a bank account. In essence, as long as you’re able to make more than 3% in the stock market, you’re doing better with your money than just keeping it in the bank.
How to start investing in stocks?
Get a trading account
The first thing you’ll need is a trading account. You can start one with standard providers like Etrade or other central banking institutions. But you can also use free trading services like Robin Hood. Standard trading services will charge fees for every trade you make. Still, new tech companies like Robin Hood have made everything completely free, which means you can invest all of your money in a company and not worry about paying fees to the brokerage. We have a link below to start a Robin Hood account where you can get a free stock to download that if you’d like.
Choosing the right companies stock to purchase
Once you have an account in any trading service, you have to decide what companies or multiple companies stock to purchase, which is arguably the hard part. You also have to have a certain amount of money stocks range from a few cents to many thousands of dollars. The critical thing about stocks is that you can’t purchase part of one; it’s either all or nothing. If you want to invest in Amazon, you’ll need at least eighteen hundred dollars to get started at the time of recording. But you can buy much cheaper, well-rated companies for a few bucks.
Starting making money
Before you make a purchase, you want to do extensive research to understand what a company does to make money, whether they’re in good financial standings, and see what experts think about a company and whether you should buy it at the end of the day.
You do have to assume some risk, so it’s essential you only invest money you’re capable of surviving without at least for a little while or until a specific stock comes back up if it does fall on harsh times.
In this article, we’ve covered the basics of the stock market, how it works, and ways to get started with it. We didn’t cover much of the technical analysis that evaluates a company, much of the terminology around stock trading, or even ways to trade without money. You’re purchasing stocks with called margin, and that’s okay for the beginning investor. The best way to learn the stock market and get involved is to take a few bucks you’re okay with losing and getting your hands dirty, and investing wisely.