How Do You Make Money From Stocks? (+ 3 Strategies You Need)
By Jason McIntosh | Published 30 July 2021
Making money from stocks is very achievable. But it's important to have the right investing strategies to help improve the chances of success. This article answers the question: How do you make money from stocks? It also explains 3 key strategies that many successful investors use. These guidelines could help grow your wealth through a profitable investment portfolio.
Key points to invest in stocks:
• Help increase the chances of success by investing in the direction of the trend (trend following). Indicators like moving averages can help determine the market's direction.
• Maximise the amount of money you could make by staying invested so long as the trend remains up. Closing a trade too soon can limit your potential to make money from stocks.
• A key factor to successful investing is to cut losing trades early. It's often better when investors take a small early loss instead of hoping the stock price will bounce back.
Okay, let's go through the 3 investing strategies...
1) Invest in the direction of the trend
The trend is a stock's path of least resistance. It helps you to find and then buy stocks that are in an uptrend. The idea is to invest money when the share price is going up, and then sell when the trend appears to be over (and the share price starts to fall).
Trading with the trend could also reduce risk by avoiding stocks in a downtrend. A falling stock will often continue dropping and cost you money. While people may think they are getting a bargain, the stock price could go even lower.
Remember, when investing with the trend you buy when a stock price is rising. This strategy can help you make money in stocks that could be in medium-term or long-term uptrends.
Here’s an example:
The key is to buy as the share price momentum is upwards. As we said earlier, the trend is the path of least resistance. Doing this can also help you avoid losing money through buying stocks that are in downtrends.
Trend following is a popular and effective strategy for capturing big trends in a stock's share price. With trend trading, an investor maximises their trading profits by staying invested so long as the trend continues to be up.
Indicators like moving averages can help an investor determine how the market is moving. The 50-day moving average is a great place to start. A stock is considered to be in an uptrend when its share price is above a rising moving average. This is an example of a potentially profitable opportunity.
There are also indicators that can help investors predict how individual stocks will perform in the near future. The Relative Strength Index (RSI) and technical analysis can provide a good indication of how prices for an individual stock might change based on its recent trends.
2) Let profits run
One of the best strategies to potentially increase profits is to let winning stocks to continue running. In other words, allow your profitable positions to remain open as long as possible. This is because closing a trade prematurely limits the potential to make money in stocks and could result in you missing out on a major uptrend.
For many people, this idea may sound counter-intuitive because of the natural instinct we often have to quickly lock in a modest profit. However, by doing so, investors might be preventing themselves from taking full advantage of a major upswing.
Here's an example:
Many investors sell their shares for a modest profit. While a 10 or 20% gain may feel good, it caps future upside and removes the possibility of making profits like 100% or more. Giving your investments time in the market is essential to maximise profits.
Staying committed to profitable stocks can also help avoid the regret of selling too early. One of the most disappointing feelings is to see a stock keep rising after selling it. This is why it's important to stick with stocks that are making money and wait for signs the price trend is over.
3) Cut losses early
It is important to cut losing trades early to protect your capital and minimise risk. In a perfect world, every stock in your portfolio would be profitable. The reality is that many trades don’t make money, so it’s important not to let your small losses become big ones.
You may not want to cut a trade that has lost money. But keeping a losing stock in your portfolio can cause more problems. It's often better to take a small early loss instead of hoping the stock price will bounce back.
Here's an example:
Even if a stock initially rises, a plan to sell is essential. Many investors hesitate to sell a stock that's falling. Instead, they hold on in the hope the shares will regain upward momentum. While some stocks do recover, others don't. These are the ones that can ruin your returns.
Keep in mind, successful investing in stocks is as much about avoiding large losses as it is about making large gains. Investors who have long term success know to protect their capital from individual stocks that fall.
This article on trailing stops discusses exit strategy in more detail.
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