Disclosure: We scrutinize our research, ratings and reviews using strict editorial integrity. In full transparency, this site may receive compensation from partners listed through affiliate partnerships, though this does not affect our ratings. Learn more about how we make money by visiting our advertiser disclosure.
If you want to increase your net worth, investing in the stock market is an excellent way to make that dream a reality. The stock market isn’t just a get-rich-quick scheme; it can be a way to build sustainable wealth.
However, it is possible to lose (rather than gain) wealth through the stock market. It’s essential to have a strategy in place and to invest in suitable securities at the right time.
What do I need to know before investing in stocks? What investments garner the most wealth? How much should I invest? When should I sell my investments? The answers to these questions and more are below.
Can a Person Become Rich by Investing in the Stock Market?
Yes, you can become rich by investing in the stock market. Investing in the stock market is one of the most reliable ways to grow your wealth over time.
People have different definitions of how much it takes to “get rich.” Some believe you’re rich if you have financial freedom, while others think you need to be a multi-millionaire, and others won’t be happy unless they are billionaires.
According to the FRED Economic Data Series from the Federal Reserve Bank of St. Louis, 89% of all U.S. stocks are owned by just the wealthiest 10% of American households. Between January 2020 and mid-2021, the top 10% had the value of their stocks rise 43%.
Clearly, the stock market can increase your net worth, but not everybody has such stellar results.
How much money you make from the stock market will depend on what you invest in, how much money you invest, and timing. Even starting to invest small amounts of money can grow your wealth substantially if you place it in a robust and long-term investment.
No matter how much you make from the stock market, if you invest strategically, that money will likely be worth more than if you invested it elsewhere.
How do Beginners Make Money in the Stock Market?
You don’t need a degree in finance or Warren Buffett as your uncle to make money in the stock market. Even beginners in the stock market can make sound decisions and earn money through stock exchanges.
While it’s true you “need money to make money” in the stock market, you can get started with small amounts.
Start investing early, if possible, so you can stay invested and give your wealth more time to increase. Plan on staying invested as long as possible.
In either case, choose an established, trusted brokerage firm that has minimal or no fees.
You can connect your brokerage account to another bank account to deposit money, or you may be able to get an employer to deposit some of your pay directly.
From there, you have the choice of investing in stocks, index funds, and more. Don’t try short selling stocks on day one or go “all in” on a penny stock or “lucky stock pick” you heard two strangers discussing.
There is always the possibility of losing money when you buy and sell stocks.
The good news is there are several ways to minimize your risk of losing money investing. Follow the tips below to make as much money as possible from the stock market.
How to Get Rich Off Stocks
To make a lot of money off stocks, you need to have a logical investing strategy and style. It’s essential to create a diversified portfolio of index funds and stocks. In general, it’s better to hold high-quality investments long-term rather than short-term.
1. Develop an Investing Strategy
Your investment strategy is a set of rules or guidelines to help you decide when you should or shouldn’t invest. Having a set strategy will keep you from making impulsive decisions out of hope or fear.
Fundamental analysis and technical analysis are the two dominant types of investing strategies. Fundamental analysts concentrate on measuring what they believe to be a stock’s intrinsic value.
This investment style assumes the current stock price doesn’t necessarily reflect the intrinsic value, and stock prices eventually correct themselves to match their true value.
Therefore, if a stock is currently undervalued, it might be wise to buy it as a long-term investment.
To determine the intrinsic value, fundamental analysts look at various metrics, such as price-to-earnings ratios, price-to-sales ratios, debt-to-equity ratios, PEG ratios, free cash flow, and much more.
They often use stock research and analysis apps to drill down into the data to understand the stock better. Fundamental analysis is a strategy for long-term investors.
Technical analysts try to figure out a stock’s future price by evaluating patterns and trends. They will look at past performance, simple moving averages, momentum indicators, trendlines, support and resistance levels, and more.
This investing style is mainly used by day traders and swing traders who make short-term investments. The market price is more critical to technical analysis than whether the share price makes sense.
Investors who increased their wealth from GameStop used technical analysis. Technical analysts believe price movements aren’t random, and price trends have a tendency to repeat themselves.
Some investors use a combination of both strategies, and your strategy will also include other factors.
For example, you might have a breakdown of what percentage of your investments you want to be individual stocks versus ETFs, etc. You might choose only U.S. investments or always have a certain amount of foreign exposure.
Make a list of all the valuation metrics you need to check when considering an investment. Decide ahead of time what metric numbers mean a stock or other investment has passed your tests.
2. Choose an Investing Style
In addition to choosing whether you want to be more of a fundamental and/or a technical analyst, you’ll have to decide if you want to invest more actively or passively.
Professional money managers run actively managed funds. These professionals actively rebalance funds’ holdings.
Having actively managed funds means you can pass on some of your investing responsibility, but these funds can come at a high cost. Passive funds cost much less and still often have high returns.
You’ll also need to decide how aggressive you want your investments to be. Calculate how much you can afford to invest.
Write down your goals, such as how much money you’ll need for retirement. This will affect how aggressive your portfolio is, and it will also affect how long you plan to stay invested.
You should have a more aggressive portfolio if you start investing at a young age because the market will have time to correct itself from any downturns. As you approach retirement, you can transition your portfolio to a more conservative asset allocation.
In general, I recommend a long-term approach to stock investing over a short-term plan to increase your wealth. It’s possible to get rich from either strategy, but long-term investing has shown itself as the last true edge in investing and thus more reliable.
With long-term investing, you gain the power of compounding to build wealth. When you reinvest your dividends, your amount of shares grow in number while simultaneously growing in value.
3. Use Index Fund Investing
Index funds follow a benchmark index, such as the S&P 500. Index funds are considered low risk because they are highly diversified.
You can usually get an S&P 500 index fund or another index for a low price and minimal fees. The expense ratio is low because the funds are passively managed.
You’re also saving money because index funds are tax-efficient. Since index funds have a low turnover ratio, they are more tax-efficient than actively managed funds.
The low turnover also means there aren’t often capital gains taxes for shareholders to pay.
Perhaps most importantly, index funds typically have high returns that beat most actively managed mutual funds. When choosing an index fund to invest in, make sure to compare expense ratios.
4. Buy and Sell Individual Stocks
Buying and selling individual stock shares gives you the opportunity for much higher returns than buying funds with many stocks. With today’s competitive brokerages, you can buy stocks commission-free.
Plus, it’s a highly liquid investment, and it also gives you more control to make your portfolio look exactly how you want.
You have the power to buy and sell at any time (as long as the market is open or your brokerage allows after-hours trading). Today, many platforms will even allow you to buy fractional shares, meaning you can always have your money fully invested.
Since you control capital gains timing when you buy and sell, stocks are more tax-efficient than mutual funds.
You can make vast amounts of money, but only if you choose the right stocks. You might start with companies you’ve heard about already.
While it’s essential to conduct your stock research, you need a starting point to know which stocks to analyze. Consider getting advice from expert stock picking services on which stocks you should check out.
From there, you can crunch additional numbers.
Only subscribe to investment newsletters and other services with proven track records. With the most trusted services, you can more than make your money back.
5. Buy and Hold Quality Stocks and ETFs
Buy both stocks and ETFs to help keep your portfolio diversified. Once you’ve found stocks and ETFs that fit your purchasing criteria, hold onto them.
You can try to time the market in terms of stock prices, but it’s usually wiser to hold long-term investments than to be constantly buying and selling.
There might be downturns, but the market generally rises, and quality, long-term investments tend to beat the market. Holding will stop you from making emotional trading decisions.
The amount you pay in taxes for capital gains varies by income level.
For most people, long-term investments are taxed at a lower rate than short-term investments, and short-term capital gains are taxed as a person’s ordinary income.
As far as taxes are concerned, long-term investment counts as anything you hold longer than a year. But to earn as much wealth as possible, you will want to hold longer than that.
Some stock picking services recommend you hold for a minimum of five years. When possible, you should try to keep investments you’ve researched and believe in for even longer.
If you hold dividend-paying stocks and ETFs, you can set it to reinvest your earnings automatically. By reinvesting your earnings, you end up owning more of the stock than you originally bought.
However, if you need some of your earnings sooner, you can get your dividends deposited into your account and use it as a passive income right away.
6. Contribute Money Consistently
Whether the market is up or down, you should continuously add money to your investment account and purchase more shares—whether fractional shares or whole ones.
The strategy of periodically investing more money, regardless of how the current market performs, is called dollar-cost averaging.
Dollar-cost averaging aims to limit the impact of volatility on your overall portfolio. Plus, it can save you time and take some of the guesswork out of investing. You won’t have to stress about whether you’re timing the market well or not.
Many folks have automatic payments sent to their brokerage account each month or couple of weeks, either directly from paychecks or a checking account.
Once the money lands in your account, you can buy more shares of your current holdings or add new investments to your portfolio.
An additional benefit from doing this comes from making investing part of your regular budget, rather than something you toss “extra” money into when you have it. The more capital you invest—and the sooner you invest it—the richer you can become.
Use Market Data to Guide Your Decisions
Market data refers to the price, bid/ask quotes, dividend per share (if applicable), market volume, and other market information. There is historical data as well as real-time data.
Whether you are more of a fundamental or analytical investor, this data is valuable. Data-driven decisions prevent impulsive and emotional purchases.
You can find some of these data points within your stock trading platform or on stock and investment websites.
Additionally, commonly-available information to you in most online brokerage accounts will show you the current share price, the 52-week range, market capitalization, volume, and more.
Sell Stocks that Generate Losses, Let Your Profits Run On
One of the most successful investors in history, David Ricardo, used math to calculate differences between an investment’s market price and its intrinsic value. Doing so identified mispriced securities worth buying for his portfolio.
Through doing this, he developed simple golden rules he found well worth following:
- Cut short your losses
- Let your profits run on
He means to say here, by cutting short your losses, that you should sell a stock immediately should its price fall or show signs of wavering. Doing so limits your downside.
He also recommends letting your profits run on, meaning continuing to hold for long periods, so long as the investment continues to perform well.
Services like the Motley Fool take these investing rules to mind when recommending stocks. Specifically, the service’s co-founder, David Gardner, believes in “[letting] your winners run [high]” while avoiding the idea of “locking in gains.”
They only recommend the best companies to make you rich in the stock market with a minimum investment period of five years. David Ricardo would have approved of their service based on performance alone.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.