Last Updated on 17 November, 2020 by Samuelsson
Pretty much everything you see on the media is glamorized and exaggerated. As such, when traders and investors are shown in Hollywood and in the news, they are usually millionaires with large houses and expensive cars. This leads many people to wonder if all that they see on the big screen translates to real life as well. This makes many of us think if we can become millionaires from stock trading.
While you need to save for a very long time it is possible for most people with a decent income to become a millionaire simply from investing in stocks! However, it is important to remember that overnight millionaire stories in the stock market are usually fabricated, or the result of one or a few lucky trades. In order to become a millionaire through stock trading, you need patience, time, and relentless persistence.
As an example, if you were to invest $300 per month, at an average annual return of 8%, for 40 years, that would become $1,000,000
In this article, we’ll explore different ways that you could become a millionaire. Let’s begin!
Way’s to Become a Millionaire From Stocks
Simply put, there are two general methods of making money in the stock market.
One of them is trading, which revolves around the technical analysis of the stocks and the market as a whole. When conducting technical analysis, you will be analyzing charts and using indicators to generate profits. These profits will usually be small but you will be able to make frequent trades to make up for it.
The other way is investing. Investing is usually focused on the long-term, with many investors holding onto stocks for decades. In investing, you take a look at a company’s fundamentals as well as the general state of the market. Using this information, you invest in companies that you think have the best future outlook and growth potential.
Investing, in turn, is often divided into active and passive investing. We’ll have a look at this in just a bit!
If you are looking to become a millionaire from stocks, then investing is the way to go for most people. While it is possible to make millions from trading as well, investing usually has a much smaller downside risk and a flatter learning curve. However, trading done right could accomplish what would take investing 10 years, in just a few years.
Here at The Robust Trader, we believe that algorithmic trading is the trading form that is most likely to deliver these kinds of results.
Let’s take a slightly deeper look at how both investing and trading works.
As we stated earlier, trading involves looking at the previous prices of a stock and determining what the future holds. If done right, a trader could significantly outperform the market, and reap great returns.
The problem with trading is that all of the strategies that work are usually adopted by a large segment of the market participants. As such, that strategy becomes useless and traders who fail to innovate simply lose their capital.
On top of this, most trading strategies that people believe in, don’t work from the beginning. Finding an edge in the markets is very time consuming, takes a lot of hard work, and requires backtesting if you want to stand a chance!
If you are interested in learning how to create a trading strategy, then you should have a look at our article on how to build a trading strategy!
As we said before, investing could be divided into active and passive investing.
Active investing has you sifting through hundreds of companies to find the perfect one. Essentially, the job of an investor is to estimate the intrinsic values of corporations and invest in companies whose market price is much less than their value. That is, they want to invest in companies that are undervalued by the market.
Remember that investing requires you to spend hours upon hours researching various different companies. The perfect company may very well be one among a hundred, and it is your job as an investor to find that company.
The good thing about investing is that you can pretty much do your research whenever you want. Whether you decide to become a full-time investor or spend a few hours every night studying up is up to you.
Passive investing means that you invest passively, without making any major readjustments regularly. As you could expect, this means that you don’t have to spend much time at all on your investments, as with active investing.
Even though passive investing takes a lot less time than active investing, quite a few active investors actually beat the market.
One very common and easy way of investing passively is to invest in index funds.
If you are planning to become a millionaire through investing, then you need to remember that you won’t be able to withdraw your profits for at least the first few years. This is because of something called ‘compounding’, and it is more powerful than you can imagine. Let’s take a look at how compounding helps you become wealthy in the long run.
The Power of Compounding in Stocks
Compounding is when your wealth multiplies. For example, suppose you are getting a 5% return on your investments. If you invest $100, you will get $5 in your first year. When the next year comes, this 5% will be a part of your investment portfolio. Now that the total value of your portfolio is at $105, the total return for the second year will be $5.25.
This may not seem like much at first, but it adds up. For example, if you invest a total of $1000 at 9% a year, you will have $2,367 at the end of 10 years. At the end of 20 years, you will have $5,604. Here, it is easy to see just how powerful compounding really is.
Below is another example of compounding, where we start with $100, and receive 8% in annual returns.
If you want to experiment with how compounding would grow your capital, then have a look at our compounding calculator!
Now, it gets even better; the average returns of the S&P 500 have been around 10% since its inception. This means that even if you fail to beat the market but manage to keep up with it, you will be able to increase your portfolio at a much greater rate than most alternative investments. US treasury yields have rarely ever been even close to 5%, and most other investments do not get such returns so consistently over the years.
Suppose you are a patient and adept value investor. Because of this, you are able to average 15% in annual returns. If you had invested $25,000 initially, at the end of 25 years, you would have over $800,000. Just a few more years and you are a millionaire.
Watch Out for Inflation
As you can see above, it is actually quite possible for you to become a millionaire through stocks. One thing that you need to remember is that your purchasing power will decrease every year by 2-3%. This is due to inflation (the increase in prices of goods). In certain years, inflation may be higher. However, inflation has been relatively stable during the last few years and is expected to stay that way.
You may also have noticed that it will take an adept investor over 25 years to become a millionaire if he/she starts with $25,000. This proves that the more capital that you have, the easier it is for you to make money off of it. Once you take inflation into account, stocks are definitely among the best long-term investment. As such, you should try to start with as much capital as you can possibly amass.
Beating the Average Market Return
If you are someone who is interested in the stock market, then you probably read financial news. While most of us are fascinated by hedge fund managers and think of them as billionaires, the truth is far from perfect. The fact is that the hedge fund managers who make the news make it because they are so successful.
There are a lot of hedge fund managers who do not beat the market. There are quite a few of them who have shown dismal performance over the year. The truth is not too different for mutual funds and other investments either. The simple truth is that most of the investors fail to beat the market average (which is why there is an average).
While it is possible for you to be a successful investor who can beat the market year on year, it is also possible for you to experience returns less than that of the market (or even lose money).
It is very hard to figure out where individual stocks will go every single year. The market can go both up and down in the short-term. However, the one thing that is certain is that the market average will rise in the long-term. A simple look at the Dow Jones 100-year historical chart proves this. And one of the best ways of taking advantage of that, is through index funds.
Index funds track a certain index such as the S&P 500. If you invest in an index fund, your returns will equal that of the market average. This is because an index fund invests in all the stocks of an index. For example, the S&P 500 will have all the 500 stocks currently in the index in its portfolio. The amount of stock purchased will be according to its weight in the index so as to completely mirror its performance.
While a good mutual fund could be more profitable sometimes than an index fund, the management fees are often higher in managed funds. Managed funds can end up taking 20% of your profits (even higher in some cases). Index funds, on the other hand, usually take an extremely small amount from your profits because the effort required to manage them is much less as compared to active funds.
Want to know more about index funds? Here is our article on index funds.
Can Trading Make You a Millionaire?
While investing is the surest way to become a millionaire, trading has its benefits too. If you have what is required to be a successful trader, you can become a millionaire much faster since the potential for higher returns is much greater with trading.
However, trading is riskier. Not only does it take a long time to perfect a certain trading strategy, but there is no guarantee your strategy will be always successful either. On top of that, traders often make use of mechanisms such as leverage which simply add risk.
If you are someone who prefers to dabble with trading rather than investing, then the best trading form for you is Algorithmic Trading. However, algorithmic trading is quite complex for the beginner. An alternative that requires less effort but can still be profitable is Swing Trading.
Stock Trading Tips for Future Millionaires
The following tips are not on how to trade stocks themselves, but activities and practices that will increase your chances of becoming a millionaire through stock trading.
- Inject extra capital into your portfolio. You saw the power of compounding above. If you have some extra cash lying around, then invest it in the stock market to make sure you get the most out of it.
- Start as early as you can. The younger you are when you start investing, the more time you have to reap the advantages of the stock market. However, being older does not mean you do not have enough time to be a millionaire.
- Preserve capital. Safe investments with a greater chance of success are always better in the long run than riskier investments promising better returns but with a lower chance of success.
- Make sure you only invest in markets you understand. For example, investing in Penny Stocks without understanding the complex nature of penny stocks is bound to result in failure and loss of capital.
Becoming a millionaire through stock trading is an arduous process. However, the difficulty in the process does not result from its complexity. Rather, the time and patience required are what causes most investors to fail. As long as you are willing to invest only in worthwhile opportunities, you can be a millionaire through trading stocks.
Remember that if you do not have the time or the willingness to trade stocks, then index funds are perfect for you. Even though index funds fluctuate up and down with the index, they are proven to be a safe and worthwhile investment for the long-term.