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Is it possible to make a living from stocks? Can we consistently "win" and make a profit trading stocks?

Since the creation of the New York Stock Exchange back in the late 1700s, the dream that you could quit your day job and support yourself just from the profits you gained from stocks has been sought after by so many people all over the world. And the good news is, it's actually possible.

However, just because it's possible to make money from stocks doesn't mean it's easy. And doing it consistently, in the long run, is even more difficult, if not impossible. In fact, studies have suggested that the majority of day traders actually lose money over the long term.

So, how can we make money from stocks? Is HODLing the only way to consistently make profits?

In this guide, we will answer those questions (and more), and we'll also discuss all you need to know about making a living from stocks. By the end of this guide, you'd have learned about:

1. How stocks work (and how to make money from them)
2. Three basic ways to make money in the stock market
3. Investing vs. trading
4. Best practices to invest in stocks and make money
5. Common mistakes made by stock investors

How Stocks Work

Before you can make money from stocks, either by investing or trading, we have to first understand how stocks work or, to be exact, how owning stocks works.

What does it actually mean to own a stock? When you buy a share of stock, you technically become the owner of the company publishing the stock.

Let's use a fictional company as an example to illustrate stock ownership:

The YYY Company has a revenue of $100 million with a net income of $10 million. The YYY company then sells its stock to the public in an IPO (Initial Public Offering), typically with the help of an investment bank.

In this fictional scenario, the company creates 500,000 shares and sells them for $40 each. So, the YYY company's net profit ($10 million) is divided by 500,000 shares. So, each share of stock in YYY company is allocated $2 of the company's profit. This is known as EPS, or Earnings per Share.

Meaning, if you've purchased 100 shares of YYY company worth $4,000, you'll be buying $200 in annual profit per year, on top of the future growth or losses generated by YYY company. If, for example, YYY company can grow its revenue by three times in 2 years, then your share of profits could also be three times higher ($6 per share), making the stock a great long-term investment.

However, in practice, YYY company's board of directors and management team can take several different options about the profits the company has generated, and their choices may impact your earnings as a stockholder. Here are some of those options:

1. The company may decide to send cash dividends to shareholders; they may also decide whether to use the whole profit as dividends or just parts of it.
2. The company may decide to repurchase its shares to increase its internal equity. You, as a stockholder, may choose to sell your stock at a higher price in this case and make a profit.
3. The company can sell more stocks and then reinvest the funds to expand the business, for example, by hiring more employees or building more stores.
4. The company may build up liquid assets or reduce debts to improve its balance sheet (which may also increase the stock's price).

Three Basic Ways To Make Money in The Stock Market

Now that we've understood how stock ownership works, we can see that there are actually many viable ways we can make money from the stock market.

However, all these different methods can be differentiated into just three basic ways:

1. Collecting dividends: as mentioned above, many companies pay cash dividends to their stockholders. Dividends are typically issued quarterly, and although typically paid in cash, sometimes companies may offer additional shares of stock.


2. Selling at a profit: the classic stock trading strategy, buy low, sell high. The goal of this method is to purchase stocks when the price is still low and then sell the stock when the price has gone up.


3. Short selling: this method is technically the reverse of "buy low, sell high" and is typically performed by borrowing shared stock from a broker or other lenders, selling them on the market, and then buying them back later when the price has gone lower. This way, you can return the stocks to the lender while keeping the margin. Essentially with the short-selling strategy, you are betting that the stock will decline in value.

As we can see, in theory, there are always ways to make a profit from a specific stock, whether it's currently increasing, staying, or declining in value. However, knowing which strategy you should take and when to actually cash out and take the profit can be easier said than done.

Ultimately, making profits from stock depends on two key factors:

1. Risk tolerance: how much money they can risk vs. how much profit they want to earn
2. Time horizon: how long an investor can afford to wait for the stock to generate profit.

Greediness and waiting too long before cashing out are common mistakes made by many investors and traders. Below, we'll discuss the important best practices to have when investing in stocks so we can avoid these mistakes (and more).

Important Best Practices When Investing in Stocks

1. To Consistently Make Profits, Stay Invested

While it's possible to make money trading in the stock market in the short term, the only way to consistently make money is via the compounding investment return you earn by holding the stocks on a long-term basis.

The stock market's average return on investment is 10% annually (although the rate is reduced by inflation), which is still better than most bonds or interests you'll get from the banks. Yet, many investors fail to earn that 10% average profit because they don't stay invested long enough.

On the other hand, don't underestimate the compounding returns you'll get in the long run, even if you've invested only a small amount.

If, for example, you've invested $10,000 and the stock increased by8% for the year (not counting the dividends, etc.), then you'd gain $800, turning your investment into $10,800 in total. Reinvest this $10,800 for another year, and it will 'grow' to $11,664. Keep this stock for ten years, and it will grow to more than double your initial investment ($21,589).

It's important to understand that while the average stock market return, as mentioned, is historically 10% annually, in reality, stock performances can vary day by day. So, if you are investing only in the short term, the risk and volatility would only be higher.

After accounting for inflation, a diversified stock portfolio can return an average of 6% to 7% annually. So, stay invested and aim for the long term.

2. Invest regularly

Not only investing for the long term is key, but to maximize compound investment return, you should continue to invest regularly.

Let's expand on the same example we've used above: let's assume we start with a $10,000 investment, but then we continue to add another $10,000 contribution every year (that is, around $200/week). In such cases, the effect of the compound return will be exponentially amplified than simply purchasing a stock and forgetting it.

Fortunately, there are now many apps and solutions that can help investors in scheduling their regular contributions. In fact, you can also leverage your 401(k) account to automate the process, for example, automating the account to take a specific amount each week or each month.

3. Diversity is key

The thing is, no stock will consistently perform, no matter how good the fundamentals are. Thus, investing in stocks (and investing in general) always carries risk: some of the stocks you invest in may underperform the following year, or even worse, the company you invest in may close down.

With that being said, it's very important to diversify your portfolio, and as the old saying goes: don't put your eggs in one basket.

By ensuring you're invested in different stocks (preferably in different types of sectors/industries, you'll be better prepared for the worst and can minimize your risks.

4. Consider getting professional help

While it's true that the digital age has made it easier to invest in stock and build your own stock portfolio, hiring an investment advisor will always have its perks.

Yes, they will not guarantee 100% success and eliminate all risks of losses, but they can help you minimize the risks. Fortunately, nowadays, there are many affordable investment advisor options, including apps and robo advisors. Identify your needs and your budget, and choose your options accordingly.

5. Have a financial plan

Before investing in stocks, it's very important to first build a financial plan, especially for two things: knowing your investment goals and your risk tolerance.

What do you want to accomplish at the moment? And how can your stock investment help in achieving these goals? Understanding your financial objectives, as well as your risk tolerance, can significantly help in choosing the right stocks to invest in, as well as in identifying an investing strategy that works for you (more on this later.)

Only after you understand your objective and your risk tolerance can you develop a proper asset allocation plan and implement the right strategy.

6. Start as early as possible

Again, the more time you stay invested, the more potential you can make profits from your stocks.

The earlier you start investing, not only can you maximize the compounding investment return of the stock (as discussed above), but you'll also maximize the opportunity to buy the stock at an average cost in the long-term (which will help you minimize your risks.)

In fact, someone who invests $100 per month in stocks from ages 20 to 30 and then stops, can actually make more profits than someone who starts at 30 and invests $100/month until they retire at the age of 65.

Start early, and invest regularly.

7. Invest in what you understand

It's crucial to understand that you don't really need an overly complex and sophisticated investment strategy to consistently make money from stocks.

Instead, the important thing is to understand the sector, industry, and the particular company you are going to invest in so you can understand how it currently performs and what the future may look like for this company.

Again, don't let emotions hinder your long-term investment objectives. Many investors make the mistake of investing in companies that sell products/services they like and use (i.e., investing in Apple for iPhone users.), while good products don't necessarily mean a good investment opportunity.

While not everyone may have the time or expertise/experience to analyze the nuances surrounding a company, it's important to at least understand the basics of how a specific stock in a specific sector can be considered a good investment.

Investing in Stocks: Mistakes To Avoid

While there are obviously many mistakes made by stock investors and traders all over the world, here are three of the most common and important ones:

1. Trying to make short-term profits

A very common mistake made by investors is to let their emotions (especially FOMO) interfere with their long-term investment strategy: an "insider" leaked that the stocks of company A will increase by 50% in a week, and you purchased the stock based on your emotions.

On the other hand, it could be very difficult to keep holding shares of stock when the market is crashing, despite the fact that throughout history, the stock market has always recovered.

It's never a good idea to try to time the market. Instead, we'd recommend investing regularly over the long term.

2. Not understanding (and paying attention) to your risk tolerance

Another very common and potentially fatal mistake made, especially by beginner investors, is not understanding and/or respecting their risk tolerance, resulting in them taking too little or too much risk; both can be detrimental.

If an investor takes a higher level of risk than their risk tolerance, they may be tempted to cash out sooner than the ideal timeframe, and they may not be able to resist cashing out in the midst of volatility.

3. Following trends too much.

Too often, investors are tempted to buy the hottest stocks at the moment or the biggest new IPO. However, as mentioned, it's very important not to follow your emotions when investing, and it's generally recommended not to pick and choose individual stocks but rather to maintain a diverse portfolio.

To avoid this mistake, we'd recommend beginner investors consider investing in index funds instead, which are made up of a diversified mix of stocks (and sometimes, bonds.) This can help prevent investors from cherry-picking individual stocks and lower the overall investment risks in the long run.

Effective Stock Investing Strategies and Tips

Based on the best practices above (while avoiding the mistakes we've discussed), below, we will discuss some proven strategies you can use to make money in stocks:

1. HODLing

The classic buy-and-hold strategy remains the most effective strategy to make money in stocks consistently.

As the old saying among stock investors goes, "time in the market beats timing the market", the basic idea behind the HODLing strategy is fairly simple: if you stay invested long enough, you'll eventually be profitable.

While there's certainly no guarantee, and you may still lose money despite buying and holding shares of stock for, let's say, ten years, sensibly staying invested is the most effective strategy to minimize this risk.

The more frequently you buy and sell stocks, the more risks you'll either buy or sell at the wrong time (buy when the price is too high and sell while the price is too low). With the HODLing or buy-and-hold strategy, you only buy and sell once, so you'll effectively minimize the risk.

2. Reinvesting cash dividends

As mentioned above, many companies pay their stockholders with cash dividends, a periodic payment (typically quarterly) based on the company's earnings and profits.

If you only own a small percentage of shares, then the amount you'll get in dividends may not seem lucrative at all. However, don't underestimate the potential profits you'll get from reinvesting these dividends.

The basic idea here is simple: with the reinvested dividends allowing you to own more shares, your earnings will compound even faster.

Check your stock brokerage offers Dividend Reinvestment Plans (DRIPs), which are essentially a feature investors can use to use their dividends to purchase fractional or whole shares of a stock at no added cost (typically commission-free).

Alternatively, you can choose to receive the dividends in cash and then use the money to purchase either the same stocks or securities manually or purchase different stocks to diversify your portfolio.

3. Make adjustments when necessary

While we've repeatedly recommended the importance of having a solid long-term investment plan and sticking with it, it doesn't mean you cannot adjust and rebalance your portfolio when needed.

Yes, you shouldn't try to time the market, but you should make adjustments to your portfolio to stay aligned with your original objective and investment plan.

For example, if your original plan is to use the popular 60/40 strategy (sticking in a portfolio consisting of 60% stocks and 40% bonds), but in the past few months, bonds have performed poorly while stocks have been showing massive gains, then your portfolio may not stay 60/40 as intended. So, you might want to adjust by selling some of your stocks and/or buying more bonds to return to your original plan.

Regularly evaluate your portfolio and monitor its performance against your original strategy and objectives, and make adjustments when necessary.

4. Consider funds over individual stocks

It's important not to overestimate your ability to predict which individual stocks will increase in price in the future. Yes, obviously, if we can identify the next Tesla and invest all our money in it, we'll get massive gains, but most investors and even the so-called "experts" will not be able to do it consistently.

This is why we'd recommend investing in exchange-traded funds (ETFs) or mutual funds to help you diversify your portfolio and lower your risks instead.

Most stock experts recommend investors invest in funds that track major indexes (i.e., Nasdaq or S&P500), which are easy and cost-effective for most investors to diversify their portfolio quickly.

5. Value investing

Value investing is a strategy popularized by Warren Buffet, and is essentially centered on finding undervalued stocks (at least, stocks the investor/analyst believes are currently undervalued), so they can make profits from them once the stocks climb in price.

In the value investing principle, a stock is considered undervalued when it doesn't fully reflect its intrinsic value, which is possible because the stock market isn't always rational (i.e., there are investors who trade based on trends or emotions).

These irrationalities, according to the value investing theory, give birth to opportunities for investors to get undervalued stocks at a discounted price, allowing them to make money from them.

While traditionally, value investors must analyze the financial data of the companies they'd like to invest in, nowadays, there are value mutual funds that can allow investors to bypass the need to analyze stocks.

The Russell 1000 Value Index is an example of such a fund, and there are also other index funds designed for value investors.

Remember, however, that value investing can only work when the investor commits to the long-term, so use it in combination with the HODLing strategy.

Wrapping Up

While it's definitely possible to make money by investing in stocks consistently, it's still important to use the right principles and strategies, or else you may lose money.

Accurately identifying undervalued stocks and investing opportunities can be easier said than done, or else everyone would be doing it right away. This is why it's very important to learn from the best and improve your knowledge first.

Looking to learn more about making money from stocks? Here at Briefing.com, there are more than enough lessons to get you started and help you learn at your own pace.