How to Make Money in Stocks in 5 steps - NerdWallet (2024)

Making money in stocks is usually a long-term game: Very few people make tons of money in stocks overnight. Here's how to sustainably grow your wealth with stocks.

How to make money in stocks

You can make money in stocks by opening an investing account and then buying stocks or stock-based funds, using the "buy and hold" strategy, investing in dividend-paying stocks and checking out new industries.

1. Open an investment account

If you want to make money with stocks, you need to have an investment account. An investment account is similar to a bank account: You put money into it, and then you can use that money to buy stocks. An investment account, such as a 401(k), Roth IRA or traditional brokerage account, is not an investment itself: It's where your investments will live.

There are several types of investment accounts, and choosing the right account for you to invest in may save you a lot of money on taxes. It may even benefit you to have multiple different investment accounts. For example, financial advisors often tell people to start investing with a 401(k), an investment account offered through employers, especially if the employer offers a match. Then, they often say to start investing in either a Roth or traditional IRA for tax benefits, then a traditional brokerage account if you have money left over.

2. Pick stock funds instead of individual stocks

If you want to make money in stocks, there is a much easier way, and often more lucrative way, to do it than buying a bunch of individual stocks. Index funds are made up of dozens or even hundreds of stocks that mirror a market index such as the S&P 500, so you don't need much knowledge about the individual companies to succeed.

With index funds, you're investing in lots of stocks all at once, and you don't have to manage them individually. Investing through funds can help decrease your risk: If you are invested in three companies and one goes out of business, it will probably hit your portfolio pretty hard. If you're invested in 500 companies and one goes out of business, it probably won't affect you as much.

Yes, it's technically possible to earn higher returns with individual stocks than in an index fund, but you’ll need to put some sweat into researching companies to earn those returns, and the likelihood that you'll actually lose money is higher.

3. Stay invested with the "buy and hold" strategy

The key to making money in stocks (remember, if you're investing in funds, you're still investing in stocks) is remaining in the stock market, financial advisors say. Your length of time in the market is the best predictor of your total performance. The buy and hold strategy is exactly what it sounds like — you buy stocks that you believe will perform well over the long-term, then hold onto them for years to come.

The stock market’s average return is a cool 10% annually — better than you can find in a bank account or bonds. But many investors fail to earn that 10% simply because they don't stay invested long enough. They often move in and out of the stock market at the worst possible times, missing out on annual returns. Making money in stocks doesn't happen overnight. Some people day trade and try to turn a quick profit, but day trading comes with additional risks.

Most financial advisors will tell you that you should invest only money that you won't need for at least five years. That way, you have time to ride out market ups and downs and still make money.

The more time you're invested in the market, the more opportunity there is for your investments to go up. The best-performing stocks 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.

4. Check out dividend-paying stocks

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 probably won’t own the stock at the critical points on the calendar to capture the payouts. You can even invest in high-dividend exchange-traded funds (a type of fund similar to an index fund).

5. Explore new industries

Some industry stocks, like commodity stocks, are tried and true. Others, like AI stocks, are booming now — but that may change. While picking individual stocks is risky, it can be exciting to explore blossoming industries. You'll want to do your homework and research the industry and any potential investments first. One way to take less risk is to invest in industry exchange-traded funds, such as AI ETFs.

3 investing myths

The stock market is the only market where the goods go on sale and everyone gets a little nervous about buying. That may sound silly, but it’s exactly what happens when the market dips. Investors, understandably, become scared and sell in a panic. But when prices rise, investors plunge in headlong. It’s a perfect recipe for “buying high and selling low" instead of "buying low and selling high."

To avoid these mistakes, investors should understand some common myths. Here are three examples:

1. 'I’ll wait until the stock market is safe to invest.'

People may feel tempted to hold off on investing after stocks go through a decline, when it's scary 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.

Fear may be the guiding emotion here, but psychologists call this more specific behavior "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.

2. 'I’ll buy back in next week when it’s lower.'

This myth crops up when people wait for the stock to drop, but you never know which way stocks will move on any given day, especially in the short term. The stock or market could just as easily rise as fall next week. Many seasoned investors buy stocks when they’re cheap and hold them over time.

If you're feeling the urge to hold out for a better price, you may be interested in dollar-cost averaging. This is an investing strategy where you invest at regular intervals over time, which smooths out your purchase price so on average you're not putting a whole bunch of money into the market when the price is either very high or very low.

3. 'I’m bored of this stock, so I’m selling.'

Some investors love the thrill that comes with investing in the stock market, and that's totally fine! Investing is sometimes a hobby for people. And as long as your retirement savings are squared away in less risky investments, it can be fun to put some money toward exciting stocks, crypto or other alternative investments. But most wealth-building investing is actually pretty boring. The best investors sit on their stocks for years and years, letting them grow.

It may seem like successful investors are trading every day to earn big gains. And while some traders do successfully do this, they are few and far between.

It's normal to have some nerves when it comes to putting your hard-earned money in the markets, but if you're experiencing an intense aversion or fear of investing, it may be worth talking with a financial therapist who can help you uncover and overcome financial trauma.