Making Money From Stock Markets
Interested in making money from stock markets or are you an enthusiast who wants to start investing and trading on the stock market?
In this post, I am going to cover all the basics that you need to know to have an understanding of the stock markets and become successful.
I hope you get a lot of value out of it, share this post, and leave me a comment.
Let’s get into this guide of the stock market for beginners.
1. To Make Money From Stock Markets We Need To know What A Stock Is?
Okay, what is a stock? What is a share of stock?
Well, essentially, a share of stock is actually ownership in a company okay.
When you buy a stock, let’s use Apple stock, as an example since most people know of Apple as a huge company.
When you purchase some shares of Apple stock you are actually part owner of Apple Corporation. The Trade under the symbol “AAPL” and are listed on NASDAQ.
If you only bought one share you are now a very, very small owner of Apple Inc.
If you were to buy all the shares, you would be a hundred percent owner of Apple stock. Unfortunately Apples like a 1.4 trillion dollar company as at 2020;-)
Buying a stock and owning shares, represents a part ownership in that actual company.
2. What Is The Stock Market?
Imagine the stock market as a big warehouse. In this big warehouse, you are allowed to trade or exchange your shares of stock with other people.
It is like a marketplace and the products being sold are shares or part ownership of companies.
You come up to me and you’re like hey, I got this one share of Apple stock.
I’ll sell it to you for $ 300. I look at it, like it and decide I want to buy Apple stock. So I give you $ 300 and you go ahead and give me that Apple stock.
We just made what’s called a stock trade.
In the old days that was essentially what it was. The stock market was a place that you went to trade your money for shares of stocks.
People buy shares hoping that the shares they buy today will be worth more money in the future.
While others sell their shares because they believe the company is not performing well. They believe the value will go down in the future.
Thank God nowadays it is all done online rather than actually being at a physical location to place those trades.
Everything is done online in literally milliseconds.
You need to understand this to make money from stock markets.
It is super simple. It has completely opened up the game and you don’t have to necessarily live in New York City or London to be at the stock exchanges.
You could be on vacation in the islands and be buying stock nowadays.
The New York Stock Exchange (NYSE, nicknamed “The Big Board”) at 11 Wall Street.
It is by far the world’s largest stock exchange by market capitalization at US$30.1 trillion as of February 2018.
The Nasdaq Stock Market is ranked second on the list of stock exchanges by market capitalization. The shares traded ($10 trillion), behind only the New York Stock Exchange.
Japan Exchange Group, Inc is the world’s third largest exchange ($5.67 trillion), behind NYSE and NASDAQ and hence Asia’s largest bourse
London Stock Exchange is the fourth largest stock exchange based in the City of London, As of April 2018, London Stock Exchange had a market capitalisation of US$4.59 trillion.
Between all the four exchanges there is $50 trillion dollars being traded. You need to jump in on the action man!
3. How Do You Actually Buy A Stock? – A Brokerage Account
Now that we know about stocks and stock markets, how do you actually buy a stock?
Well, you need to set up a brokerage account to trade and make money from stock markets.
We normally use online brokers. The online broker connects you to the stock exchanges.
A brokerage account allows you to buy and sell investment such as stocks, bonds, exchange traded funds (ETFs), and mutual funds.
This account type can also be referred to as a taxable investment account to differentiate it from tax-advantaged retirement accounts like individual retirement accounts.
A lot of you guys might know something called the Robin Hood app and that’s an app that a ton of people that are newer to the stock market ended up getting involved with.
You could also use something like TD Ameritrade, or something like fidelity investments, TradeStation and E*Trade amongst others.
There are pluses and minuses of all those different brokerages. My preference is TD Ameritrade. (Read review)
You really can’t go wrong with the above brokerages. They don’t even charge you for the trades, which is amazing.
Let’s Imagine the Apple example, where you wanted to buy one share of Apple stock.
10 years ago when I first started getting in the stock market, it was actually like $ 20 for every time I bought or sold a stock.
Now you can do it for free, now you can do this through your computer or tablet, so all you need is the money in your account to buy those shares.
You can even place trades now on your smartphone, and so it is super simple to make money from stock markets.
You could actually go to literally the stock market in New York City, but that doesn’t make much sense for 99.9999 % of people reading this!
Today you can literally just buy stocks directly through your phone or or computer so that’s how you actually buy a stock.
Setting up a brokerage account is very similar to setting up a bank account, you need to enter all your personal details and prove who you are etc.
The normal KYC (know your customer stuff) we are used to. So that’s how you actually buy a stock.
4. How To Make Money From Stock Markets
There are many many different ways that you can make money in the stock market, but we’re just going to cover two because this is more of a beginner’s guide.
The main two ways you can make money in the stock market,
Buy low and sell high
Have you ever heard the expression buy low and sell high? That’s essentially what you do to make money from the stock market.
So imagine you bought Apple stock 20 years ago way before the iPhone or Apple had all this massive success right?
20 years later it would be worth I don’t know 10 X or 20x, or Maybe a hundred X, more than what you paid for those shares.
So basically buying shares low in a company, has success over time and you are able to sell that stock for a much higher valuation.
Much higher than when you had bought that stock, and that’s one of the ways, a lot of you guys will make money from the stock market.
The second way to make money from stock markets is by making dividend income.
Not every stock in the stock market actually pays dividends, but a good chunk of them do.
When a stock pays you a dividend it’s money that is credited to your brokerage account that you can even invest in that same stock or different stocks.
Those are the two ways you will make money from the stock market.
Buying stocks low, selling them high, and making that dividend income and using that dividend income to go ahead and compound into more and more gains over time.
Okay, so those are the main ways on how you can make money from the stock market.
By the way, you can make money other ways in the stock market as well as doing complicated things like stock options, etc which we will discuss in another post.
5. Why Should You Invest In Stocks And The Stock Market
I have three main reasons why I believe everyone wanting financial freedom should invest in stocks in the stock market.
Well, these three reasons are the same reasons that got me involved in the stock market.
Very easy to start with minimal investment.
The first reason you get to start for very cheap.
A lot of investments are very costly, some of them require thousands of dollars to get started.
For some, tens of thousands or even hundreds of thousands of dollars.
But when it comes to stock market investing you could open a brokerage account online on your phone in probably 10 to 15 minutes, and you could put as little as $ 100 or $ 200 in there and you are all set up and ready to start investing.
That’s how easy it is and the only barrier to entry is your cash and know how 🙂
So the fact that you don’t need a ton of money to get started in stock market investing is huge.
When I first started in the stock market my first investments were probably less than $2500 in total.
I probably had about $30,000 dollars to my name at that particular time, so pretty much any other investment class at that time was unrealistic.
This was back in 2005-2006. Stock market investing was what was actually possible for me with a few dollars in fees per transaction.
Nowadays we are fortunate to invest online with very little fees.
You can make more money from the stock market than other investments if done right
If you are successful as a stock market investor, you can make a lot more money in this than most investments with minimal effort.
I know of people who only trade 2 hours a day!
Investing in real estate investing is amazing, but, generally speaking with real estate, investing you’re, not going to get a 10 % 20 %, 30 % return from real estate.
Investing like that’s just super unrealistic, but from the stock market. If you’re a really good stock market investor, you can get 15% to even 25% percent a year on average.
Meaning for some years you actually do much better whilst some years it might do a little worse.
But on average you’re doing very, very well and keep in mind if you just have your money in an index fund on average that money is going to grow about 8 percent per year.
The gains you can get from stock market investing are amazing.
We spoke about index funds. What are index funds?
An index fund is a exchange-traded fund (ETF) or mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments.
Legendary investor Warren Buffett and Jack Bogle (Vanguard) recommend index funds as a haven for savings for the later years of life.
Rather than picking out individual stocks for investment, he has said, it makes more sense for the average investor to buy all of the S&P 500 companies at the low cost an index fund offers.
An index mutual fund provides broad market exposure, low operating expenses, and low portfolio turnover.
These funds follow their benchmark index regardless of the state of the markets.
Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts.
If you want to invest in the United States, the easiest way is to buy a fund that replicates the S&P 500.
The S&P 500 has a worldwide exposure since just over 50% of its revenues are from the US with the rest coming from international sources.
What is S&P 500
The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
It is one of the most commonly followed equity indices. Warren Buffet believes that investing in The S&P 500 index funds long term is a wise investment to make.
After talking about S&P 500 i am sure some of you are asking what about Dow jones?
What is the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow, is an index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.
Although it is one of the most commonly followed equity indices, many consider the Dow to be an inadequate representation of the overall U.S. stock market compared to broader market indices such as the S&P 500 Index or Russell 3000.
This because it only includes 30 large cap companies, is not weighted by market capitalization, and does not use a weighted arithmetic mean.
Dow Jones is mentioned a lot on TV due to the fact that its price is higher than the S&P 500 so makes better each catching headlines when its value changes.
For example, the Dow Jones index dropped 1200 points!
However the reality is institutional investors and investor like you or me do not invest in the DOW. We choose the S&P 500 because it is very diversified and gives the across board spread of risk and rewards.
Ease of availability of research information
The third reason has to do with the availability of research information. The information is so easy to get.
If you’re researching a company, as an example.
If you want to look at Apple’s stock you can get a fundamental understanding of Apple’s business model within a three or four hour period.
You literally just go on google and type like Apple Investor Relations read their the 10-K and 10-Q forms.
Start listening to conferences where they talk about their business model, what happened in the last quarter, and investor presentations.
A lot of companies have those on their Investor Relations page.
Read the annual reports, and gain an understanding of how the business actually makes money, what the profits margins are. What the gross margin is and what the net income is.
You can learn all this information from a computer or your smartphone, that’s in your pocket.
For most other investment classes, getting the information is pretty difficult.
So what are forms 10-k, 10-Q and 8-K are talking about.
What is form 10-K
A 10-K is a detailed report filed yearly by all publicly-traded companies. It is about its financial performance and is required by the U.S. Securities and Exchange Commission (SEC).
10-K is more comprehensive than a company’s annual report, which is sent to its shareholders before an annual meeting to elect company directors.
The 10-K includes an overview of the company’s main operations, including its products and services, history, organizational structure, financial statements, earnings per share, subsidiaries, executive compensation, and all relevant data needed to analyse the company.
The 10-K forms is published so investors have fundamental information about companies so they can make informed investment decisions.
This form gives a clearer picture of everything a company does and what kinds of risks it faces.
Because 10-K filings are public information they are readily available. You can find them on most companies’ Investor Relations section of their website.
10-Ks can also be retrieved by using the company search function through the SEC’s EDGAR database.
So you can see how easy it is to find out information about listed companies.
Along with the 10-K companies regularly file forms 10-Q and 8-K.
What is form 10-Q
Form 10-Q are submitted to the SEC on a quarterly basis.
This Form 10-Q is a detailed report of a company’s performance. It includes all the important information about its current financial position and is usually unaudited.
It is filled three times a year as the 10-K is filed in the fourth quarter.
What is form 8-K
The form 8-K though is required by the SEC. 8-K is filed whenever companies announce major events of which shareholders must be made aware.
These events may include but aren’t limited to sales, acquisitions, delistings, departures, and elections of executives.
It also includes changes in a company’s status or control, bankruptcies, information about operations, assets, and any other relevant news.
These three documents in addition to the annual report give you enough information to decide on your investments.
This information is so readily available. The only thing you need is a device with internet connectivity.
Those are the three main reasons why you would want to invest in the stock market.
1. Very easy to start with minimal investment.
2. You can make more money than most other investments if done right
3. Ease of availability of research information
6. What Is The Benefit Of Individually Stock Pick In Making Money From Stock Markets
Now why pick individual stocks like Apple stock, Amazon stock, Facebook stock, Tesla stock or uber stock and not put your money in the index fund where you could probably get like 8 % a year on average.
What is the benefit of individually stock pick and will it help make money from stock markets?
Well, the reason it is so great to pick individual stocks if you have the work ethic and know all the things to look for in stocks is because, at the end of the day the gains you can get are just amazing.
Investing and picking stocks is like going to the gym. Imagine in the gym you alway use a little 2.5kg dumbbell every day you are in the gym.
2.5kg it’s hardly a weight to build muscle. It may help you to stay in decent shape or tone your muscle but hardly a body building weight.
That is what happens with index funds. You will be able to get gains over time, say 8% per year.
However if you increase the weight of the dumbbells for curling your arms, which in my example is analogous to individual stock picking, the gains you can get are so much higher.
Truth be told, there is a little more risk when it comes to picking individual stocks compared to an index fund, like S&P 500 passively.
With S&P 500, your money is diversified. Whereas, if you pick individual stocks, for example your 10 favorite stocks they are not as diversified as the S&P 500.
If one of those stocks goes bad for any reason, it can hurt your account quite a bit.
So there’s a little more risk when it comes to picking individual stocks, but the gains you can get if you’re successful can be astronomical over the course of a 10, 20 or 30 year time horizon.
It is a complete game-changer in making money from stock markets!
7. What Do You Actually Look At When Judging A Stock.
Let’s say you want to buy a stock and you’re looking into Tesla stock or any stock in general.
The question is what do I look at in this research of stocks so I can make money from stock markets?
Read forms 10-K, forms 10-Q, forms 8-K and annual report
The first thing you want to do is go to the company’s Investor Relations webpage. You literally just google Tesla Investor Relations, page.
For your stock research you want to read their forms 10-K, forms 10-Q, forms 8-K and annual report.
10-K is like an annual report that talks about the company over the past year and 10-Q looks at the latest quarter, ie. last three months span.
Listen to latest conference calls for last two-three quarters
You need to want to listen to the latest conference calls for the last two to three quarters, so you can get up-to-date on the business.
On those conference calls ask a lot of different questions to the CEO and CFO, so you can just learn about the company.
Familiarize yourself with the figures you got out from there.
Ask yourself these questions
Ask yourself these questions.
- Is this a business model you think is going to do well in the future.
- Do you think it’s going to expand?
- What are the competitive threats in the space, etc.
Once you’ve figured out that and you like the business (NB: Don’t be emotionally involved , just the figures on all the documents).
Then start going on to the valuation and look at:
- Income statements,
- Balance sheet,
- Future growth rates and
- Ratios in comparison with the average for the sector
Hearing all these different terms can be quite confusing and complex especially if you’re somebody new…Don’t worry, it takes a while to learn all this but it’s easy to learn.
The fundamentals don’t change. You earn it once and use that knowledge forever.
You are going to use this knowledge to look at a company and pick the stock you want to invest in.
Important things to note when picking stocks:
1. Have a long term horizon,
2. Fully understand the business,
3. Like that business,
4. Believe in it for the long term and
5. Make sure to get the stock for an undervalued valuation or at least a fair valuation.
These five things are key to success and if you’re able to successfully do them you’re going to make a lot of money from stock market investing over time.
8. What Is The Worst Case Scenario If You Buy A Stock?
The worst-case scenarios are far in between. As an example, let’s say you buy some stock in XYZ company right and they sell drones.
You like their drones and think they are awesome. Their drones from your research are some of great and some of the best available.
You expect them to grow and continue to expand the market so you go ahead and buy some shares of stock in XYZ company.
The worst case scenario for you is that :
- They went bankrupt,
- The company couldn’t raise any more money.
- They couldn’t make any money,
- No one bought their drones again, and
- You lost a hundred percent of your investment.
So let’s say XYZ company was $50 a share and you bought 10 shares in that stock. You just lost $500.
However, if you’re buying stocks from great companies that are fundamentally sound, the chances of losing 100% are pretty slim. Probably less than 0.1 percent probability.
I don’t believe I’ve ever invested in any in my life that went bankrupt over the 15 plus years I have been in the stock market.
I made a few mistakes with a few stocks out there, but even those companies didn’t even come close to bankruptcy.
Chances of a total loss are negligible but there is a risk going in that you have to understand and that in the worst case you could 100% of your investment.
Now that we have looked at the worst case what is the best case scenario?
9. What Is The Best Case Scenario For Buying A Stock?
When investing in stocks the best case scenarios are infinite gains as the company grows and increases market capitalization.
In the XYZ drone example we used above with this stock you can gain a 500%, a 1000%, 10,000% there is no limit to how much money you could make on a stock.
I have seen great stocks multiply 5X, 10X and 20 X in value in a matter of a few years.
It is really infinite what you can gain from the right companies and pick of stocks. There is no upper ceiling to making money from the stock markets!
When picking stocks ask yourself if you see them doubling over the next 2-3years and if you can realistically see your money doubling in general over a three to five year span, then that is definitely a stock I want to be part of.
The best thing for me when it comes to judging stocks is when I can find that opportunity. Where the reward is potentially 2x, 4x, 5x or 10x whilst bearing in mind the risk potential as well.
We will talk about type of investors in another post in relation to our risk torelance.
10. Taxation On Stock
Taxes, taxes, taxes! Make money from stock markets means you have to pay taxes on gains.
We all need to pay our fair share of taxes as our social responsibility.
When it comes to stocks the truth is you don’t pay any taxes until you decide to sell out of that stock.
You only pay taxes on the gains you made on the stock and pay different percentages based on how long you held the stock…
Personal income tax rate: If you buy shares and sell it within 365 days you pay taxes at the personal income tax rate on the gains you made and in the US it could be 20%- 50+ percent for higher rate payers.
The gain is going to be taxed as regular income, so that’s, going to count toward your regular income.
It is similar in other countries as well, but find out your country specific rate with a simple internet search.
In this example, if we buy 10 shares in Tesla at $448.16 each, and within 150 days the stock increases in value to $600.00 and we decide to cash in on day 151.
You will pay taxes on the gains you made at the personal income tax rate.
Capital gains tax rate: However if you buy shares and hold that stock for at least 365 days you qualify for the capital gains rate, which is 15% in the US.
In the UK capital tax on shares is charged at 10% or 20% (depending on your tax band) over your annual CGT exemption which is £12300 in 2020-21 tax year.
So using the Tesla stock example, If we buy 10 shares in Tesla at $448.16 each.
If within 150 days the stock increases in value to $600.00 and then decides to hold for more than 365 days you pay no tax.
You will only pay Capital gains of 15% therabout when you sell after one year..
You can minimize or avoid capital gains taxes by investing for the long term using tax-advantaged retireplans and offsetting capital gains with capital losses.
That is one of the advantages to being a long term investor in stocks,
I hope you learned a lot from this about how to make money from stock markets and got a tonne of value from this article.
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