Investing in companies through the stock market is often touted as a way to make real wealth for yourself, and even wealth for your family through generations. But how do people get rich from stocks, especially when the stock market is so volatile?
How to Get Rich in the Stock Market?
1. Understand the Stock Market and Stay Focused
When it comes to growing your wealth in the stock market, you need to have a working understanding of the stock market itself and be comfortable with long-term investing. Very few people become overnight millionaires off of a lucky stock pick, so don’t count on that happening to you. You can use financial advisor if you need help getting started. The Paladin Registry, for example, is a service that connects investors with certified advisors who are fiduciaries (that means they are required to act in your best interest).
Stay focused on your investment goals and stay calm in down periods. Let the market work for you.
2. Budget for Investing
Budgeting your income is a powerful tool for your investments. Include your investment contributions in your monthly budget so you can track your investments over time.
Look for areas that you can cut back in your spending so you can increase your investment amount. Whatever amount you already contribute to your investments, cutting back on another spending could mean investing even more. There's no shame getting help in organizing your finance.
3. Use Index Funds
Picking one stock that is going to make you rich is a bit unrealistic. That’s why index fund investing is so popular.
When you invest in an index fund you are broadly diversified. By investing in many different companies in one fund, your investment in each fund is automatically smaller. This means you earn less from each company. But that way also, should some of the companies turn out to be lemons, you don’t lose as much money.
Rather than seeking the one stock that will change your life forever, index fund investing is good for the buy-and-hold strategy and getting rich in the stock market over time.
4. Buy and Hold
What the Apple example clearly shows is that buying and holding a stock can be enormously beneficial for your finances. “Buy and hold” refers to buying stock shares and holding on to them for the long term, even when the stock market is down.
Most legendary investors preach the glory of the buy-and-hold method. In 2016, Warren Buffet said, “The money is made in investments by investing and by owning good companies for long periods of time.”
5. Short Selling
Short selling is the opposite strategy of buy and hold. People are looking to make money in the market in a shorter time frame, and they do that by “shorting” stocks.
Here’s the gist: You borrow stocks and sell them at current market prices and receive a cash payment. But since you’ve only borrowed the stocks, you need to replace the stock that you sold. And you are responsible for paying dividends for the length of time that you borrow the stock.
When people short sell, they want the stock to drop sharply so they can buy it back at a much cheaper price. This means they can take home the difference. And sometimes the difference is a lot of money, which makes short selling a way you could get rich in the stock market.
Shorting the market requires a knowledge of the market and an educated guess on when the stocks will go down. You don’t want to borrow them for too long, because you’ll end up owing a lot in dividends. If you're interested in short selling, you can buy and sell stocks through a brokerage firm like E*TRADE.
6. Contribute to Your Portfolio Consistently
Contributing to your investments consistently over the years is a great strategy to grow wealth in the stock market. It's one strategy that works for the average American paycheck. Many people don’t have huge amounts of money at any one moment to invest but do have smaller amounts that they can consistently contribute over the years.
Consistency is a strong investing move. Say you start with an initial investment of $3,000. Invest $500 a month over 30 years at 6% interest, and you’ll have $523,022 in your accounts.
At $1,000 a month, you’d have $1,027,897 at the end of 30 years.
You can use a calculator like this one to see how different levels of monthly contributions can make a difference in your investment results, and If you’re just getting started, you can use an automated investing service like Betterment. For those with a bit more experience, try Personal Capital. It not only lets you keep track of all of your finances in one place, but also has a stellar wealth management service.
Know The Math Behind Getting Rich in the Stock Market
When Apple went public in 1980, the price per share was $22. If you had invested $5,000 and held on to it until August 2018, you would have watched the share price grow to more than 10 times its starting price, to $227.63 per share. But even more important, the stock split 56 times during that time.
With $5,000 to invest, you could have bought 227 shares in 1980. By 2018, after Apple had split its stock and changed its business model a few times, you would have 12,712 shares in the company. At $227.63 per share, your initial $5,000 investment would have grown to $2,893,632.56.
That’s using the stock market to get rich. Really rich. Long-term investing like that, over the course of 38 years, would have made you a multi-millionaire from just one company.
So how do you make that much money from the stock market? While there is no one right answer, there are a few things you can keep in mind.