Can investing in stocks make you rich? Yes. Investing in stocks, when done right, can make you rich. To succeed when investing in stocks, there are few options. The first one is to invest in index funds or ETFs. These are already well diversified and by buying them, you basically buy fractions of shares of a lot of different companies.
I have a post about can investing make you rich, where I go through more generally what you can accomplish with investing, you can read it here. This post is dedicated more to stock picking and how this way of investing can make you rich.
The other option which we are going to discuss more in this post, is investing straight into stocks. Picking stocks yourself can be intimidating but also fun and rewarding if you succeed. Let’s dive right into it.
How stocks and stock market works?
If you are familiar with how the stock market works, you can skip this part. When you buy stocks, you buy partial ownership of the company. When you own part of the company, part of the profit the company makes belongs to you.
Let’s say you happen to own a lot of stocks of a company. You have 10% of the shares in the company, and it makes 100 000 in profit. 10% which equals 10 000, is “your cut” and can be paid to you as dividends, or it can be reinvested back into the business to grow it. This is how stocks work on a really simple level.
It depends on the business if they pay the profit as dividends or reinvest it. This is just a rough example and the percentage of what you will own from the companies you invest in through stock exchanges probably wont be 10%.
How to pick the right stocks?
When picking the right stocks, there are as many ways as there are investors in the world. There is no right or wrong way of doing so, but I will give you some ideas to think about.
Think about companies as art. Mona Lisa is probably well known among people and is considered as masterpiece. There are companies that are truly masterpieces as well.
When deciding which companies, you will invest in, think about them as pieces of art, and choose the masterpieces. If you were buying art, would you want to buy secondhand art that nobody else is buying, and because of that, the price is falling?
The price of the stock
If the stock has been falling a lot, this can be caused by several things. One thing that is affecting the price is that there are more sellers than buyers in the market, and/or the people willing to buy it are not willing to pay so high price for that.
Even if the price of the stock is falling, it can be a masterpiece. There are factors in the market that drive the stock prices of even the greatest companies down. Times when the indexes have been falling, might be a good time to add pieces of fine art to your portfolio.
And just a reminder if someone just caught up, by fine art, I mean, the companies that are masterpieces. That might have taken centuries or even decades to build up to what they are today. Through stock exchanges, you can have partial ownership of these masterpieces.
How to create a stock portfolio
When building your own stock portfolio, there are a lot of ways to do this. Some follow what the big players are doing. I am guilty of doing this myself. It can give some good insight into what the big players are doing. There is a delay, however, but you can see the positions they have been adding and selling.
Here are two of the hedge fund portfolios I keep an eye on. Not sponsored, I just though it could be helpful to some of you, maybe get some inspiration.
https://hedgefollow.com/funds/Bridgewater+Associates
https://hedgefollow.com/funds/Pershing+Square+Capital+Management
Another option to build your stock portfolio is to just think about yourself, what are the companies that affect your life and are the masterpieces? There can be some in your country as well. It doesn’t necessarily have to be Coca Cola, even if it is a nice company. Smaller companies can be masterpieces as well.
Do stocks pay dividends?
Some stocks pay dividends; some reinvest the profit to grow the business. Which ones should you add to your portfolio? This is up to you. There are some pros and cons about paying dividends.
Pros: You will get quarterly or yearly paid from your investment. You can use these dividends to buy more of the stock or to do something else.
Cons: Most of the times, when you get dividends, you will have to pay taxes on them. If the company just reinvested the profits back into the business, its value would grow, and you would delay tax paying. On longer periods of time this can affect the snowball effect if you had to pay taxes all along.
Stock picking can be hard
Picking the right stocks and trying to beat the index can be very difficult. It can take a lot of time to research all the companies, and even if you do, there is no guarantee of returns. There are so many different factors that affect prices, it is close to impossible to predict them all. However, stock picking can be considered a hobby as well. Hobby where you try to find the masterpieces for below the market price and that way beat the index.
My personal strategy is to invest 80% of the money I put into the stock market into low-cost index funds. This should keep my overall portfolio above water even if my stock picks aren’t that great. The rest, 20% of the money I put into stocks of my own choice. This will keep my interest up when I can see how my own picks are performing daily. You can choose what is the best way to invest yourself.
Final words
So, can investing in stocks make you rich? According to past data, it definitely can. The main purpose of the company is to make profit for its shareholders. This way, no matter what stocks you pick, they are at least on paper, supposed to make you a profit.
Keep in mind that past returns are not a guarantee of future returns, and most of the people can’t beat the index in the long run. It might be a better option to invest in index funds or ETFs. There are differences between funds as well. I have a post comparing active funds to index funds and how it will affect your return in the long run; you can read it here.
I have other investing related posts as well; you can read them here.
Hopefully this was helpful to you, have a nice day.
This is not investment or financial advice. Past returns are not a guarantee of future returns. Always do your research before risking your hard-earned money.