Investing in the stock market is one of the best ways to make money. You won’t get rich off a salary and the return on savings and bonds is not high enough to make an impact in your lifetime.
Stocks provide you with the option to make money but buying stock blindly and investing in stocks you know nothing about won’t lead to success. .Being disciplined, taking the long view, diversifying and learning the basics of investing are some of the ways to ensure success.
How does the stock market work?
Companies that need to raise money issue shares and these shares are traded on a stock exchange. Investors and traders buy and sell the shares based on what they think they are worth and which direction they believe the share price will go.
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Go to www.thestockdork.com to learn more about how to build wealth by investing in stocks and other assets. For example, you can read about the nine best stocks to buy for under a dollar or the stocks leading the race to a COVID-19 vaccine.
Ways to make money on the stock market
- Buy low and sell high
A straightforward way of making money on the stock market is to buy low and sell high. This works in much the same way as buying goods at wholesale prices and then selling them at higher prices.
If you are strongly convinced that a stock price is going to go up after a time, you can buy it and then sell it off when the price has gone up to make a profit. Of course, everyone wants to buy low and sell high but timing the market and consistently being able to identify highs and lows can be very difficult.
- Short sell high and buy back at a low price
The aim of selling at a higher price and buying back at a lower price is to profit from a stock price decrease. Being ‘short’ basically refers to a position that benefits from the price falling. For example, an investor may take this position believing that a stock will decline when a company announces its annual earnings.
A regulatory requirement is that the investor must borrow the stocks first before short selling. One exception to this is when you are doing day trading because you will have bought back the stock before the market closes.
Regulatory requirements for short selling are different in different countries so it is important to check them and make sure you comply.
- Sell options on stocks
An option is a contract that means a buyer has the right to buy/sell underlying asset amounts at a predetermined price before the date when the contract expires. When investors sell options on stocks, they collect premiums from the buyers. Options get their price from the value of the underlying assets, such as stocks, bonds, commodities etc.
When buying an option, the buyer pays the seller for the right to trade at the strike price (predetermined price) before the contract expires and this price is referred to as a premium.
The premium is, therefore, the cost of buying the option contract, which allows the buyer to eventually buy the underlying asset. Options typically only last a few weeks and if the buyer does not exercise the option before the expiry date, it is worthless.