How to Make Money in Stocks With 3 Critical Components

Last Updated on July 23, 2023 by pf team

You don’t need to wait for the next hot stock tip from your golfing buddy to make money in stocks. In fact, most successful investors use a more disciplined approach to investing, seeking long-term value rather than often-erratic short-term gains.

how to make money in stocks
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Discover the 3 most important components for making money in stocks

While not as exciting or as glamorous as doubling your money on a stock tip from your golfing buddy, a formulaic approach to investing is less risky and — over time — can yield impressive results, helping to build a secure future.

You’ll want to consider 3 key components: share price increase, dividends, and time, adopting a buy-and-hold strategy to build long-term wealth.

#1 Share price increase

electronic board with stock symbols
source: iqoncept / bigstock

This component to making money in stocks seems obvious, but it’s also important to understand why a stock might go up over time. Stock prices move based on the basic economics of supply and demand.

Supply refers to the number of shares available, but specifically, you’ll want to think of supply as being the number of shares available at a given price.

At lower prices, there may not be any supply, effectively keeping prices from falling below a certain level. Demand refers to the market’s interest in owning a given stock.

If only a small number of people see value in owning that stock, stock prices will stagnate or fall.

If a large number of people want to own the stock, the increasing demand pushes the stock price up to a point where sellers are willing to part with some shares. Several factors can drive demand, ultimately causing stock prices to rise — or fall.

When your focus is long-term, company earnings will be key to share price increases. The dot-com boom of the late 90’s made many millionaires — and then broke many hearts (and portfolios).

The market was trading largely on speculative hope because many of the dot-com companies of the time weren’t making money or weren’t making enough to justify the share price.

Demand pushed prices up, but tech stock prices eventually crashed because of a lack of earnings relative to share prices. Demand disappeared and because no one wanted to be the last one holding stocks in unprofitable companies, prices fell quickly.

Hope can create short-term demand but sustainable earnings create long-term demand, causing stock prices to go up more consistently over time.

#2 Dividends

dividends cards over us money
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Companies that generate sustainable earnings often also pay a dividend, which is a quarterly payment to shareholders paid from profits and is often a fixed amount per share. The dividend yield refers to the amount of the dividend in relation to the stock price.

Dividing the annual dividend amount by the share price gives you the dividend yield, which is a percentage. Dividend yields vary by company and by industry, with some industries known for higher dividends than others.

For example, Real Estate Investment Trusts (REITs) are required by law to pass most of their earnings through to investors as an ordinary dividend.

A dividend can help your long-term growth but a dividend yield that is abnormally high can be a sign of trouble, wherein investors are selling the stock and causing the price to fall (and the yield to rise).

Tech companies are often on the other end of the dividend scale, paying a lower dividend yield. Choosing an investment based on the dividend yield alone can be a mistake.

Instead, you’ll want to consider the big picture, including the company’s long-term earning opportunities and historic performance, both of which can provide insight into the future direction of the share price.

The average dividend yield for the S&P 500 over the last decade has been about 2%. In 2008, the yield jumped to 3.23%.

This was because the broad market was in freefall but the trailing 12 months of dividends caused the yield to look higher relative to falling share prices.

There are several points in the S&P’s history where average yields were much higher, even reaching above 7%, but these examples are as much a reflection of monetary policy as they are of market sentiment.

With more recent monetary policy, since the early 90’s, the average dividend yield has been about 2%. Dividends can often be automatically reinvested, allowing you to build wealth in two ways: share price increases and dividend investments.

In both cases, you’re putting the power of compound interest to work for you. Choosing investments that pay a sustainable dividend can help your portfolio to grow more substantially, particularly over a longer period of time.

#3 The “buy-and-hold” strategy

buy sell or hold on an electronic display
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Timing the market is notoriously difficult to get right. There may be opportunities to make money on short-term trades or even with day trading, but the risks are high and the trading costs can easily devour your profits if you trade frequently.

Let’s face it. None of us knows with any certainty where the share price of a stock will be in 10 days, or 10 hours, or 10 minutes. It’s a risky guess at best.

However, the concept applies to more than just short-term trades. The buy-and-hold strategy is an acknowledgement that we just don’t know what will happen in the short term.

If you look at a chart from any stock that has performed well over a 10-year period, you’ll see plenty of peaks and valleys where the stock price rose and where the price swooned, rising again later.

Fortunes were made and lost in those variances by short-term traders and market-timing schemes, and sometimes both, with traders losing it all after a profitable run.

Now, imagine you bought shares at the beginning of that 10 year period and simply held your stock.

Prices went up and down, but the overall direction continued northward. In effect, you made money by not doing anything except remaining resolved.

Your trading costs as a percentage of you gains become negligible and time smooths out daily share price movement as the chart expands.

In effect, a buy-and-hold strategy becomes akin to taking a thousand foot view of your investment, removing you from the angst and uncertainty of daily price movements.

The buy and hold strategy also removes risk in another way, by preventing losses that occur as a result of not being in the market when prices are rising.

Stock prices don’t go straight up or straight down, but the overall trend for the broad market has been up since trading stocks became a common method of investing.

Buying and holding a stock or a fund ensures that you enjoy the big gains when they come. By trying to time purchases or sales, it’s more likely that you’ll miss out on some very profitable days.

JP Morgan
source: J.P. Morgan

For example, in J.P. Morgan’s Guide to Retirement, the guide illustrates what would have happened if you missed the best days in the market by choosing not to stay invested.

The illustration details the performance of a $10,000 investment in the S&P 500 between the beginning of 1999 and the end of 2018, a 20 year span.

Interestingly, some of the best days in the market came immediately following some of the worst days in the market. Investors who held their shares through the downturn were able to recoup the paper losses by just staying invested.

  • Fully invested: Ending value $29,845, which is a 5.62% return
  • Missed 10 best days: Ending value $14,895, which is a 2.01% return
  • Missed 20 best days: Ending value $9,359, which is a loss of 0.33%

The trend continues, with losses increasing as more up days are missed by not staying invested.

For diversified broad-market investments, like an S&P fund, the best way to make money in the stock market is to just leave your investment alone, even if may look like the sky is falling some days.

History shows that downturns and bear markets turn around. In October of 2007, the S&P 500 index hit a high of 1,576.09. By February of 2009, the index closed at 735.09.

Selling at the low point would have resulted in a massive loss. Investors who held their positions, however, would have recouped the paper losses by 2013.

By 2019, the S&P index had nearly doubled to about 3,000. Those who bought and hold won big. Those who sold when things got rough took a real loss, not just a paper loss.

How much money can you make from stocks?

Among the many companies that make computers, tablets, and smartphones, Apple has long been a standout. Recent years have been good for the broad market but Apple has outperformed the S&P 500, providing nearly triple the return of the S&P index.

A $10,000 investment in SPY, an exchange-traded index fund that tracks the S&P 500, in July of 2009 would be worth $41,664.76 10 years later in 2019.

That’s impressive by any measure but choosing a great company to invest in can increase returns even further.

By comparison to the S&P index, a $10,000 investment in Apple stock (ticker: AAPL) would be worth $117,432.24, an increase of 1074%.

Apple stock (appl) chart
source: Yahoo finance

The value in Apple stock hasn’t just been in the share price appreciation. The company also pays a respectable dividend, which the company brought back in earnest after the passing of Steve Jobs, Apple’s founder who famously opposed dividends, preferring to reinvest and save for a rainy day.


In 2012, Apple’s dividend, which had been on hiatus since 1995, was reinstated, most recently paying 77 cents per share for a quarterly dividend in May of 2019. Recent years have seen the quarterly dividend increase from 47 cents per share.

Currently, Apple’s dividend yield is about 1.5%, which is strong for a company with such dynamic stock growth performance. Dividend growth over the past 5 years has been 10.5% per year.

Apple’s change in dividend strategy rewards investors while still keeping enough earnings to fuel future growth and plan for future expenses.

Earnings per share (EPS) for the 1st quarter of 2019 were $2.46, of which the company shared $0.77 with investors as a dividend, representing about 30% of earnings.

Buy back shares

Apple’s return to paying dividends came in tandem with a decision to buy back shares. Recent news indicates that Apple may shift direction, placing a keener focus on its stock buyback program.

When a company buys back shares, it means a couple of things.

The first takeaway is that the company is flush with cash, indicating strong financial performance. It’s also a sign that the company wants to create more value for shareholders.

A stock buyback reduces the number of outstanding shares, which then increases earnings per share. The result is a stock that becomes more attractive from a price to earnings perspective, likely driving up share prices.

The caveat to this is that if the dividend isn’t increased, the dividend yield, which measures the dividend as a percentage of share price, will fall.

Dividends themselves may remain unchanged, but the yield is effectively lowered. In its two most recent stock buyback announcements, with a total of $175 billion committed to repurchasing Apple stock, the company simultaneously announced dividend increases as well.

Growth and leadership

All this may make Apple seem like Santa Claus to investors, but the company also uses its strong earnings to continue its growth and leadership position.

The company now invests nearly $4 billion per quarter in research and development, double the amount the company committed just 5 years ago.

Apple’s share of the US smartphone market is now over 45%, impressive in such a crowded field of competitors. The company has also built a cult-like following for its other flagship products, including its Macbook line of laptops and iPad tablets.

As time goes on, expect to see Apple as a major player in the development and implementation of 5G, an emerging wireless standard that promises more capacity and data speeds of up to 100 times those offered by current 4G networks.

What options do you have for investing in stocks?

investing in stocks options
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For every Apple, Google, or Microsoft success story, there are countless other companies that didn’t fare as well. When choosing individual stocks, it’s important to also remain diversified and keep different types of stocks in your portfolio.

Also, depending on your risk tolerance and investment goals, some types of investments may be a better fit than others.

Dividend stocks

Dividends can be a powerful way to enhance long-term gains and can even provide a respectable income stream once you have enough invested. On the high end of yields, you’ll often find REITs, real estate trusts that pay out the majority of their earnings in dividends.

Be aware of the type of dividend that is being paid, however. Some structures, like REITs, pay a standard dividend, which is taxed at a higher rate than the more common qualified dividends paid by most corporations.

Companies with consistently higher-than-average dividend yields may not provide the dynamic returns you might find with a tech company. Instead, expect slow and steady growth, while being paid for your patience in the form of quarterly dividends.

Sector-specific growth stocks

Amazon, Google, Microsoft, and Apple are all well-known growth stocks — but at some point, growth can slow. Consider emerging technologies or consumer behaviors and look for companies poised to capitalize on the future.

Often, the price to earnings ratio on growth stocks can make the stock look expensive at first glance, but that didn’t stop Amazon’s stock from growing from $1.73 in 1997 to over $2,000 per share in 2019.

$10,000 invested in Amazon in 2009 would be worth $259,000 10 years later in 2019.

Tech stocks aren’t the only place to find growth. Chipotle Mexican Grill posted a year over year earnings growth of nearly 60% in Q1 2019 and Visa grew income per share by nearly 20% in Q2 2019.

Choosing carefully can produce outsized gains when companies are growing earnings this quickly.

Mutual funds

Often not well understood, mutual funds can hold shares in many companies and may also allocate a percentage of the fund’s holdings to bonds or other financial instruments.

When you buy shares in a mutual fund, you own part of the fund — but the fund owns the assets.

You can think of a mutual fund as an indirect way of investing in companies, often led by a fund manager or a management team that chooses which assets to buy or sell, and when.

Do your research before choosing a fund, including past performance and fund expenses, in particular.

A number of low cost mutual funds are available to meet the investment goals of most investors but many funds still have costly fees associated with buying or selling shares or for managing the fund.

Mutual funds can be purchased through brokers or, in some cases, directly from the fund provider.

Exchange traded funds (ETFs)

ETFs are cost effective mutual funds with some important distinctions. The most notable difference is that ETFs are traded on stock exchanges. This makes buying or selling an ETF easy and helps ensure liquidity.

Trades are settled at the price at the time of sale, whereas mutual fund sales are settled based on the value of the fund at the end of the day.

ETFs that track an index are a popular way to stay diversified, although the ETF market has evolved and now you can find ETFs to match nearly any investment interest.

Index funds

The concept of index funds refer more to a strategy than to a type of fund because you’ll find index funds available as ETFs or standard mutual funds.

An index is usually a group of stocks, but can also track other types of assets. SPY is among the most popular ETF index funds and tracks the S&P 500.

John Bogle founded the first index fund in 1975, facing criticism from peers in the investment community who felt investors wouldn’t be satisfied with average returns.

Bogle’s index fund was later renamed the Vanguard 500 Index Fund, which also tracks the S&P 500.

While it’s easy to point to average returns of many index funds, that’s exactly the attraction, particularly since many actively-managed funds produce below-average returns.

Investing tips from successful investors

successful investors shaking hands
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We can all benefit from the wisdom of successful investors. Warren Buffet is often regarded as the most successful investor of all time — but even he had a teacher, crediting part of his success to Benjamin Graham, a disciplined investor known as the father of value investing, which places an emphasis on fundamental analysis and a contrarian mindset.

Warren Buffet epitomized the buy and hold investor, famous for stating that his favorite holding period for a stock is forever. Many of Buffet’s notable quotes have as much relevance in life in general as they do in the world of investing.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”

“In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”

John Bogle, inventor of the index fund, had a seemingly different take on investment focus, although Buffet also espouses the benefits of index investing for many investors. Here are some of Bogle’s words of wisdom.

“When there are multiple solutions to a problem, choose the simplest one.”

“The true investor . . . will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

“Don't look for the needle in the haystack. Just buy the haystack!”

Avoid common investing mistakes

Time and consistency can make even someone with only average investing knowledge look like a genius. It’s often mistakes that separate a typical investment portfolio from the best performing portfolios.

Avoiding common investing mistakes can help keep the wind at your back as your portfolio grows.

  • Timing the market: Value investing has its role and some companies are clearly a good value. However, many investors try to time trades based on when they think the best time might be or for emotional reasons. None of us are omniscient and attempts to time the market could mean you miss out on some of the market’s biggest days. Often, the best way to enter or exit a position is gradually — and with well-reasoned logic as your motivation for the trade.
  • Herd mentality: Buffet made much of his money by betting against the crowd. Following the herd can easily lead to overpaying for shares in the next big thing — which may fizzle — or to selling at the first downswing, resulting in a loss. Buying high and selling low is among the most common examples of herd mentality. Choose your investments wisely and without regard to the hot stock of the month. Seek value or growth potential, or both.
  • Failure to diversify: Even if you want to make a bet on the next Amazon, Apple, or Facebook, you’ll still want to diversify, committing only a portion of your portfolio to individual stocks or stocks in a given sector. Let’s face it. The real value of some stocks is zero, even if it isn’t immediately obvious. Diversification helps prevent your portfolio from taking an oversized hit, which could potentially set you back decades.
  • Trading too much and too often: While related to herd mentality and timing the market, frequent trading can also be expensive. A single trade can cost hundreds of dollars in commissions or fees, depending on the size of the order and how the order was filled. It could take months in the next trade — or even longer — to offset the cost of the last trade. Investing is safer and less expensive than trading.

Making money in stocks and investing is a get-rich-slow plan

You don’t need to be an investment guru to make money in stocks. Following a few simple principles will point you in the right direction (up).

Time and consistent investment intervals will take care of the rest. Often, it’s best to think of investing as a get-rich-slow plan.

What you’ll find, however, is that as the years roll by, your investment will grow impressively, with the growth in later years massively outpacing the early years through the magic of compounding.

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