How to Make Money in Stocks: Key Factors For Stock Investing

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Talk to any financial expert, and they’ll say stocks are crucial for building long-term wealth. The catch with stocks is that they can grow like crazy over the years, but their daily ups and downs are totally unpredictable. So, how do you make money with stocks? It’s not that tough if you stick to some tried-and-true strategies and stay patient.

Pick the Right Investment Account

Sure, the specific investments you choose matter a lot for your long-term success, but the type of account you use to hold them is a big deal too. Some accounts come with sweet tax perks, like getting tax deductions now with traditional retirement accounts or enjoying tax-free withdrawals later with Roth accounts. Both types let you skip paying taxes on any gains or income while your money sits in the account, which can really boost your retirement savings over time.

But there’s a catch. You usually can’t take money out of retirement accounts like 401(k)s or IRAs before you hit age 59 ½ without facing a 10% penalty and any taxes you owe. There are exceptions, like high medical costs or the financial hit from the Covid-19 pandemic, that let you dip into the funds early without penalties. Still, the general rule is to leave that money alone until you retire. On the flip side, regular taxable investment accounts don’t give you the same tax breaks, but you can withdraw your money anytime for any reason. This flexibility lets you use strategies like tax-loss harvesting, where you sell losing stocks to get a tax break on some gains. Plus, there’s no limit on how much you can contribute to taxable accounts each year, unlike 401(k)s and IRAs which have annual caps.

So, it’s all about picking the “right” account to get the best returns. Taxable accounts might be a good fit for investments that don’t lose much to taxes or for money you’ll need in the next few years. On the other hand, investments that might lose more to taxes or ones you plan to keep for a long time could be better in tax-advantaged accounts. Most brokerages offer both types of accounts, but not all do, so check if your brokerage has what you need. If they don’t or you’re just getting started, check out Forbes Advisor’s list of the best brokerages to find the right fit for you.

Reinvest Your Dividends

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A lot of companies pay their shareholders dividends, which are regular payments based on their profits. Even if those dividend payments seem small at first, they actually play a big role in the stock market's overall growth. From September 1921 to September 2021, the S&P 500 had average yearly returns of 6.7%. But if you reinvested those dividends, the returns jumped to almost 11%! That's because every reinvested dividend buys you more shares, making your earnings grow even faster. This compounding effect is why many financial advisors suggest long-term investors reinvest their dividends instead of spending them. Most brokerage firms let you reinvest your dividends automatically through a dividend reinvestment program, or DRIP.

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Opt for Funds Over Individual Stocks

Experienced investors know that diversification, which means spreading out your investments, is key to reducing risk and potentially increasing returns over time. It's like not putting all your eggs in one basket. While many investors choose between individual stocks or stock funds like mutual funds or ETFs, experts usually recommend funds to get the best diversification. You could buy a mix of individual stocks to mimic the diversification of funds, but it takes time, knowledge, and a good chunk of money to do that right. A single share of one stock can be pretty pricey.

Funds, however, give you exposure to hundreds or even thousands of individual investments with just one share. Everyone wants to invest in the next big thing like Apple or Tesla, but the truth is, even pros don't have a great track record of picking the winners.  That's why experts suggest most people invest in funds that passively track major indexes like the S&P 500 or Nasdaq. This way, you can benefit from the stock market's average annual returns of about 10% in the easiest and cheapest way possible.

Buy and Hold

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There's this saying among long-term investors: "Time in the market beats timing the market." So, what’s that about? Basically, one popular way to make money in stocks is by using a buy-and-hold strategy. This means you hold onto stocks or other securities for a long time instead of constantly buying and selling (also known as trading). Why's that important? Well, folks who are always trading in and out of the market every day, week, or month often miss out on big opportunities for solid yearly returns. Not convinced? Check this out: The stock market gave a 9.9% annual return to those who stayed fully invested during the 15 years. But if you were jumping in and out, you risked missing those returns.

• If you missed just the 10 best days in that period, your annual return dropped to only 5%.
• Missing the 20 best days? Your return was just 2%.
• And if you missed the 30 best days, you actually lost an average of -0.4% annually.

So, being out of the market on its best days means way lower returns. It might seem like the easy fix is to always be invested on those days, but it's impossible to predict when they’ll happen. Sometimes, great days follow big drops. Basically, you’ve got to stay invested for the long run to catch the market at its best. A buy and hold strategy can help you do that. Plus, it’s a bonus come tax time since it can qualify you for lower capital gains taxes.

Similar Reads You May Enjoy: Benefits of Holding Stocks for the Long Term in the Markets

Conclusion

If you want to make money in stocks, you don’t need to spend your days guessing which companies' stocks will go up or down in the short term. Even top investors like Warren Buffett suggest putting your money in low-cost index funds and holding onto them for years or even decades until you need it. The key to successful investing is pretty straightforward, though maybe a bit boring. Just be patient and trust that diversified investments, like index funds, will pay off over the long term instead of chasing the latest hot stock.

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