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How much money can you make on stocks? This is a question every novice investor asks himself. Although stocks carry a lot of risk, they are still very popular and are one of the financial instruments most preferred by investors.
How much money can you make on stocks?
Stocks are one of the most popular financial instruments and are among the interests of novice investors. Despite the relatively high risk of loss, they are still a popular choice at the beginning of the stock market adventure. However, it is not exactly a good asset for beginners.
How much money can you make on stocks? It’s hard to give a definite answer, since the profit from stocks consists of many different factors. It is possible to earn on shares, but these are instruments that should be reached for with a certain level of knowledge and experience in investing. Otherwise, you can only be disappointed and discouraged from further investment.
Besides, investing in the stock market is not an activity for impatient people. If in the first year of making investments, the investor does not lose, and comes out at zero it is already very good. Usually beginner investors close the first year with a loss. Profits come with time, with the acquisition of skills and experience.
What are stocks?
When a company needs to increase liquidity, of course it can take out a bank loan. However, the alternative is to issue shares. An investor, in turn, can invest his money in a specific company by buying shares, or stocks. When a company issues new shares, it receives the money that investors have invested. People who purchase shares are called shareholders. In return for investing the money, they become co-owners of a specific company. The profits and losses of a company are often reflected precisely in shares. In fact, a share is nothing more than a transferable proof of ownership of part of a company’s capital.
What determines the value and price of a stock?
How much money can you make on stocks? The price of a stock is determined based on the last transaction, and this can take place when the buying and selling parties come to an agreement, regarding the price. As with other products, the price is very often influenced by the balance between the following and demand. This means that the more people decide to invest in stocks, the higher the price will be. The company’s profit expectations very often play a key role in this case. If the profit forecast is high, demand is likely to increase. The price of a stock can be different on each trading day.
In theory, profits affect investors’ valuation of a company, but there are other indicators that are used by investors to predict the price of a stock. It is worth remembering that investors’ moods, attitudes and expectations affect the final stock price. Before deciding to invest in a stock, each investor will consider the future expected performance of the company. Based on this, he will be able to determine the value of the stock and whether the current price is too low, too high or ideal.
How much money can you make on stocks? Types of shares
When it comes to investing in the stock market, stocks and shares can be used interchangeably. The two main types of shares are:
- Ordinary – are more common than preferred shares for a simple reason – most shares are issued in this form. The main difference between ordinary shares and preferred shares relates to voting rights. Ordinary shareholders usually get the right to vote on company matters, such as the election of board members. Therefore, these shareholders also influence the rules in the company and its management. Usually a shareholder buying one share gets one vote,
- Preferred – investing in preferred shares involves the investor not receiving voting rights. However, this type of stock also has its advantages. Shareholders of preferred shares are usually guaranteed a fixed dividend, but the dividends are usually variable and also never guaranteed. In addition to this, preferred shareholders come before common shareholders to redeem their shares in the event of liquidation of the company. For this reason, they have a better chance of recovering at least some of their money than ordinary shareholders.
What is a stock fund?
Investing in stocks can be done through a stock fund. This is an investment fund that simultaneously invests in several companies. This automatically diversifies the investment portfolio and spreads the investment risk. For an individual investor, the advantage of investing in a stock fund is that it is held by a manager. The disadvantage, however, may be the relatively high costs that the investor pays for the fund manager’s performance. A similar alternative when it comes to investing in stock funds is ETFs. These are exchange-traded funds that follow an index, region or sector. ETFs are sold to the market just like stocks (read also: Exchange-Traded Funds).
Investment risks associated with stocks
How much money can you earn on stocks? Buying stocks can, of course, bring profit, but it is not without risk. It is worth being aware of the risks that are associated with investing in stocks (read also: Safe investments in the stock market). For example, when it comes to stocks, the risk associated with price changes is important. A stock that an investor buys today may have no value tomorrow. In addition to the risks that are associated with the price, there is also the danger, associated with the bankruptcy of the company.
Before an investor starts making money on stocks, he should consider various factors. This helps determine what risks he wants to take and which products suit him best. It is also not advisable to invest funds that may be needed in the near future, nor is it advisable to decide to take positions that may cause financial problems for the investor.
Important questions that an investor should ask himself, before investing
The question – why do I invest seems trivial. In this case, the answer will always be the same – to make money. But does everyone really know well what investing in the stock market entails? Before investing, it is worth asking yourself some important questions.
Why do investors choose to invest?
Is investing in stocks just a hobby, or is it meant to be a source of income? Most people invest to make more money. This is the main definition of investing. Every investor hopes to make more than he did at the beginning, despite the fact that often the adventure with the stock market is started out of curiosity.
It often happens that amateur investing in the stock market, turns into something bigger, and may even be a prelude to a professional career in the stock market. Others, on the other hand, treat the capital market as one of the opportunities for additional profit.
Whether an investor approaches investing as an amateur who is looking for the right place for his own financial surpluses, or as a professional, several important principles should be followed. These include, for example, capital preservation. What does this mean? As you already know, playing the stock market involves the risk of losing money. An investor must prepare for the fact that not every transaction will end in profit. However, his goal is to make such decisions that profitable transactions yield more than losing ones.
What expectations does an investor have of profit?
Investing in stocks is associated with many myths. Investors usually begin to take an interest in this form of investment when there is a buzz about stocks in the media. During a so-called bull market, i.e. strong as well as prolonged growth, stocks can reach several or even tens of percent. This, in turn, influences expectations and sparks the imagination. In the same way, during a bull market, when the share prices of most companies fall, investors can also lose significant amounts from their capital.
Stock markets move in specific cycles that replicate the behavior of the economy, so to speak. During a good economy, stock prices rise, and during a weak one they fall.
When starting to invest in stocks, it is worth being aware of this.
And how much money can you make on stocks? While, of course, high performance is as possible in this case, an investor will not always be able to buy stocks that will only go up. Sometimes his decisions will involve companies whose shares are losing value, which will involve losses. In addition, there is no such technique that only allows you to make money on the stock market. In this case, the same principle works as in business – not some investments are earned, and others, unfortunately, are lost.
How much money can you earn on stocks? A measure of the behavior of the stock market, are the indexes. There are several of them on the stock market. The average yield shown by an index is 16%. This takes into account price changes and dividends paid by companies. However, the average does not show individual dips and rises, i.e. that in a given year prices can rise by as much as 60% and in another year fall by 50%.
Investors’ expectations of possible returns should include this data. During a bull market, when most stock prices are rising, some will rise faster, another less. And still others may fall. Likewise, during a bull market, most stocks will fall, but some may be very strong, others weaker, and a small handful of companies, against the general trend, may even rise. The behavior of companies depends on what industry it is, as well as the size of the company. It matters whether it is a thriving, dynamic business with sizable prospects, or whether a particular company is a large, mature business where investors do not expect spectacular growth, but only regular growth.
What losses is an investor able to accept?
Investing in the stock market is fraught with risk. The effect of stock price fluctuations on the stock market is that, unfortunately, not every investment will end in profit. There will be some on which investors will suffer a loss. Losses can even occur several times in a row. When it comes to making money on the stock market, during a downturn, stocks have it that most fall, although even individual companies have done above average. The volatility of stock prices means that the online stock market is associated with the risk of loss.
What usually happens is that the stocks of young, small companies can rise really strongly. However, this is one side of the coin. They can also experience sudden, violent plunges when it turns out that their plans have not quite succeeded, or have ceased to be valued among investors for other reasons.
Each investor has a partial, definite influence on the risk of his investment portfolio, or invested funds. He should determine his “pain level”, i.e. the acceptable possible loss on a certain investment, quite a lot in advance. It should not be 5, 10 or 15 percent. In this case, there is no universal rule, because each investor individually approaches this issue.
In many cases, the threshold will be related to the chosen approach to investing in the stock market. Those who act very quickly, so-called day-traders, can set limits for themselves very closely, since price volatility is limited during the day. On the other hand, long-term investors who intend to hold stocks for at least several months should set themselves a maximum allowable loss of at least a dozen percent.
It should also be remembered that the choice of the right technique, is related to many different aspects. Day trading requires the investor’s near-constant presence at the quotations and the conclusion of various transactions, as well as the satisfaction of a low profit. Deciding to invest in the stock market for the long term, the investor does not need to spend a lot of time evaluating and monitoring the market, and can consider companies that pay dividends.
How much can an investor allocate to investments?
In particular, due to the risks associated with investments, it is important to remember that the funds for investing in stocks, should be carefully considered. It is not recommended to invest money from it should be credits or loans. Nor should it be the investor’s savings, which are earmarked for a black hour or for a specific purpose (such as buying a car in 6 months). The invested funds should be free from encumbrances of the type that the investor will need them in a month.
Investing in stocks can be started with really small amounts, such as $100. It is worth knowing that many shares cost a few dollars. However, in such a situation, it is worth remembering the proportionally high cost of commissions, as well as the limitations, associated with the access of shares of many companies, whose prices can be tens and sometimes even hundreds of dollars apiece.
A reasonable and responsible way to start is with amounts of several thousand USD. This allows the investor to build a portfolio of several investments, and in addition, unsuccessful transactions that bring losses will not be so painful for the investor if his investment portfolio is diversified.
How much time can an investor spend playing the stock market?
Often investors spend long hours playing. In this case, it’s not just about reviewing quotes and looking for opportunities. In particular, it’s time spent reading analysis, learning new information, as well as learning and improving. Depending on your method and expectations, investing in the stock market can resemble a full-time job or just a supplementary income.
Most investors, however, devote an hour a day or even an hour a week. During this time, they make investments, take stock of them and plan new ones. In many cases, these are routine activities. Of course, as experience is gained, this time can be reduced. Initially, when the investor is constantly learning and trying to learn as much as possible, this time tends to be longer.
Develop rules and a plan of action
For any business, it is necessary to have established rules and a plan of action. The same is true for investing in the stock market. Many investors buy and sell stocks under the influence of emotions. This is unfortunately the first step to failure. It is best to develop rules that address the key elements of each transaction, such as buying, selling and risk.
Regardless of what analytical method an investor uses, it is best to have one’s own clearly defined set of factors for buying stocks. Very similar principles will apply to selling an investment. In this case, it will be additionally helpful to set one’s own “stop levels,” i.e. those moments when the investor categorically sells the shares he or she owns in order to avoid compounding losses. This type of approach will also result in the investor knowing at each stage of the investment what the risk is, i.e. how much he can lose.
Keeping a diary
Keeping your own diary or even taking notes allows you to control the entire investment procedure. Writing down the reasons why certain stocks are interesting, why you bought them and other ideas systematizes the process of investing in stocks and often allows you to take a critical look at your own decisions.
Summarizing once a day, or maybe even together for a week, the results of investing allows you to objectively look at whether the way you have been trading so far is working and profitable.
How much money can you make on stocks? This is worth remembering
Making money in the stock market involves several important issues that are always worth keeping in mind. Applying them will help reduce investment risk and achieve a measurable profit.
Diversify your portfolio
This is one of the key ways to minimize the risk, associated with loss. Diversification of an investment portfolio involves an investor buying at least several different assets. In addition to stocks, he decides to buy, for example, bonds (read also: Investing in stocks and bonds), ETFs or invest in gold. Thanks to this, in a situation when, for example, stocks fall, such an investor with other instruments in the portfolio can avoid a high loss, as the other assets will offset it. If an investor had only stocks in his portfolio, in the worst case scenario he could lose all his capital.
Investing in instruments that you know
Being a novice investor in particular, it is best to invest your capital only in those assets about which you have some knowledge and understanding. Investing in the stock market in financial instruments about which one does not have the faintest idea is likely to end in painful failure. Therefore, it is worth acquiring theoretical knowledge beforehand, which is invaluable when investing.
Investment in stocks and other instruments involves continuous learning. This is an activity for people with perseverance and patience. It is advisable to use ebooks, books, webinars about online articles. It is also worth opting for a course or training in investing. This will give the investor a broader drink of the stock market and money placement.
Practice makes perfect
When it comes to investing, theory is also as important as practice. Before an investor decides to make transactions on the real stock market, he should try his hand at a demo account. Currently, virtually every broker that provides a trading platform offers free use of a demo account. You can practice on it, get an idea of how the stock market works, but also test selected investment strategies (you may also read: Online trading and Stock market simulator).
A demo account allows you to play the stock market for real, but is devoid of investment risk. The investor can make transactions, even risky ones, without fear of losing money. The demo account can be used for up to several months, until one reaches the right skill.
Choosing an investment platform
A trading platform is a tool that investors use to make trades. The intermediaries that make them available are brokers. Choosing the right platform is important because it can either help or hurt the investor. There are many platforms available, and among the most popular are Meta Trader 4 and Meta Trader 5.
Before choosing the best trading platform, you should pay attention to several decisive issues, such as:
- Features and supporting tools – it’s worth checking whether the investment platform offers useful tools, such as a macroeconomic calendar,
- Availability of markets – there really the more, the better. Before making a decision, an investor should check whether the platform not chosen offers access to the assets that interest him,
- Pricing – the cost of commissions, spreads, for maintaining an account, making trades, withdrawals, etc.,
- Speed and reliability – a good investment platform should respond instantly. When it comes to investing, every second matters, so the platform must not delay the investor’s movements, as this will affect profit or loss.
Choosing a broker
Related to the choice of an investment platform is also the choice of the right broker. It is worth betting on well-known and reputable brokers, who, moreover, are regulated by institutions such as the National Financial Supervision. After all, the investor entrusts his money to them, so he should also pay attention to security. Popular brokers include eToro or xStation.
Confidence and keeping emotions in check
Acting under the influence of excitement and other emotions is likely to result in failure. The best investors are able to approach investments with a cool head, and as a result, they win. This is a very difficult skill to develop, but a very useful one. Although it is hard for a beginner to restrain his emotions, it is worth trying and practicing, as it allows you to make much better investment decisions and multiply your capital.
How much money can you make on stocks? Unfortunately, there is no definite answer to such a question, if only because a lot depends on luck. In the initial stage of investing, it is best to focus on protecting your capital funds, and only then count on profits. They will certainly vary, depending on the month.