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Top 3 Rules to Make Money in Stocks

by Sagar Jain
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Rules to Make Money in Stocks

Have you ever considered making money investing in the stock market? There is good money to be made in the stock market, but it is something that you need to study thoroughly first before jumping in.

The stock market is where the general public can invest and become part owners of listed companies by purchasing the company’s available shares of stock. These investors or “stock/shareholders” earn by buying or selling, i.e., “trading,” their shares based on its price in the market at any given time.

However, the stock market, just like any venture investment, involves risks. It’s a gamble (albeit an educated one with the right knowledge), and you have to be mentally and financially prepared before you get involved. You can minimize your risks with proper planning and adequate knowledge about the companies you intend to invest in.

Here are some basic rules to help you get started making money investing in the stock market.

Rule Number One: Only invest your extra cash or money you can afford to lose.

Yes, you can double, triple even quadruple your initial investment. But you can also lose big time for reasons that are beyond your control.

Rule Number Two: Be very clear about your intentions.

Are you buying stocks as a long-term investment? Or are you in the market for the short-haul? Your answer will help you choose the company you will invest in.

For example, premier companies like Coca-Cola, Chevron, and Procter & Gamble are the safest and most sought after investments given their years of stability and ability to weather economic or industry downturns.

These companies are called “blue chips,” and their shares usually command a higher price.

Prices of these shares are not subject to sudden surges and tailspins in share prices, making them an excellent long-term investment. Besides, such companies more often than not pay dividends in good times and bad.

In contrast, volatile, high-risk stocks can turn in huge profits within a short time. But you can also expect dramatic drops in share price, losses of which you may or may not regain even over an extended period.

Such stocks are usually associated with new companies or those who recently opened their ownership to the public. Its stock price can initially skyrocket in value as investors and traders speculate on its potential for success. But once the “furor” dies down, its price begins to fall, possibly to an amount lower than your buying price.

Another kind of high-risk shares is the overpriced stocks, which tend to show too much price momentum within a short period. Amazon, for example, peaked in the US$100 range in 1999 but ended up trading at only US$15 per share by the end of 2000. It took quite a while before its value climbed to about US$3000 minus inflation’s effect on the real value of a dollar.

As a beginner in the stock market game, your two best options are:

(a) Play it safe and invest in blue-chip stocks but be prepared to hold on to these over an extended period to realize substantial profits; and

(b) Spread your investment, that is, choose a variety of stocks (which can either be all blue chips or in combination with high-risk shares). It should help you recover possible losses from one type by gains in the others.

Rule Number Three: Understand how the stock market works.

Read. Probe. Ask friends and colleagues who own stocks about their experiences and learning. Find out what factors they consider before investing in a particular share. How do they decide when to buy or sells their stocks?

Rule Number Four: Be an “active” investor.

Please don’t leave it all up to a broker to decide how to manage your shares. It is also the best way to understand how stocks behave in various situations. Keep abreast of developments in the business world, the environment, in a particular industry where your chosen company is doing business. Attend stockholder’s meetings and understand your company’s financial health, its plans, and programs, the challenges it faces.

Once you’ve considered all these factors and remain upbeat about your prospects in making money investing in the stock market, it’s time to buy your shares, which can either be preferred or common shares. Each type of share has a distinct privilege and right for the shareholder.

Preferred shares are ranked and valued higher (and cost more) than common shares being the more stable investment because it guarantees a regular dividend. Preferred stocks are also prioritized over common stocks when it comes to the payment of dividends and the distribution of a company’s assets in case of bankruptcy. However, holders of preferred shares do not get voting rights in the business, unlike common shareholders.

Aside from enjoying voting rights, common stocks, meanwhile, can also rake in more profit for its holder depending on how much the company is valued or rated by investors (also called capital appreciation). As ratings rise, the price of common stocks almost always follows, giving its owner a chance to earn more if he decides to sell.

You can purchase either of these stocks through a brokerage or Direct Investment Plans or Dividend Reinvestment Plans. In the case of using a broker, you can obtain the services of a full-service brokerage or a discount brokerage; the latter charges less in terms of service fee and offers less assistance.

A Direct Investment Plan, in contrast, lets you buy stocks directly from the company, but usually only after you have already purchased stocks earlier on. The other type is through a Dividend Reinvestment Plan, which automatically allows you to buy stock using the dividends given to you by the company. No “cash-out” on your part, and you likewise increase your dividend as your number of shares purchased increases. In both cases, however, check that the company you are interested in offers such plans.

Are you making money by investing in stocks or thinking about doing so? Be sure to share your comments, thoughts, ideas below…

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