Last Updated on 11 September, 2023 by Samuelsson
Investing or trading the stock market can be a quite demanding task, especially if you’re on your own. You don’t know what to expect, and with most investing and trading activities being long term, it may be hard to know if you or anybody else actually can make money in the long run.
There are people who consistently make money in the market, while there are others who mostly lose money. Generally, the market favors those who invest long term, and punishes those who don’t have the perseverance to endure the ups and downs of the market. However, depending on the type of trading or investing you do, this might not hold completely true all the time.
In this article, we’ll look at what you need to do in order to have a chance at making money in the stock market or any other financial market. You’ll also learn about some of the biggest mistakes traders and investors make, and how you can avoid them.
In addition, we’ll look at how you should go about when choosing a trading or investment style that fits your style and personal needs.
How People Are Making Money in the Stock Market
When it comes to finding a method that works and can deliver profits reliably, there really is no clear framework that can be regarded as the one and final truth. Investment and trading styles vary a lot, and what works for one person might be far from ideal for someone else.
However, you could divide people who make money into three categories. If you want to make money, you’d better belong to one of these!
Here they come:
- Passive investors
- Active investors with a proven strategy
- Traders with a proven trading strategy.
1. Passive Investors
Passive investors put their money to work by investing sums in rather passive assets like index funds, and then let their invested amount sit for a long time. They rely on the bullish drive of the stock market to deliver profits long term.
Investing passively in index funds or similar investment vehicles has been a very successful approach historically. On average, the US stock market as a whole has managed to deliver returns around 10% on average, which will make the capital grow considerably over longer time periods.
Warren Buffet, the famous investor, more than once has stated that investing in index funds is the absolutely best way for most people to reap the benefits of advancing markets. We fully agree!
2. Active Investors
Those who want to spend more time on their investments and actively pick the stocks they believe will outperform the market fall under this category.
Active investors typically look at the performance and finance-related metrics of a company to determine how much a stock should be worth. Then, if it’s undervalued by the market, meaning that it trades at a too low price, it qualifies to become part of the investor’s stock portfolio.
Beating the market through fundamental analysis is extremely hard. Unfortunately, most people will underperform against a simple buy-and-hold strategy, like that of the passive investor.
3. Traders with a PROVEN Trading Strategy
Another category of people who make money, which probably is the category that attracts the most attention, is those who trade the markets actively.
Now, many people claim that they know how to trade, and there indeed is a lot of information around on the internet that claims to describe trading methods and approaches that are profitable.
However, most of the things online don’t work at all, and cannot qualify as “proven” strategies. This is the reason most people who trade the markets actively don’t fall under this category.
So what do we mean by “proven strategies”?
Well, in short, we mean that the strategy has been tested extensively on historical data, and shows promise. This is done with the help of a so-called backtesting platform, which is covered in much more depth in our article on backtesting. In essence, you get out a report which shows key metrics for the strategy, and how it has fared historically.
What’s the Best Option for You?
When it comes to becoming an active investor who chooses which stocks to buy and sell, we must be clear about one thing:
Most people do not succeed to beat passive investing. This applies even to professional fund managers, where it has been shown that as many as 95% don’t beat the average index fund over longer time periods!
What this means, is that a majority of people will be better of just buying an index fund, and then forget about it in the coming years. The longer you wait, the more certain you can be that your investment will be worth more than the amount you initially deposited.
For those of you who want to become more active as an investor, it’s important that you realize that things are going to be easy. You simply have to spend a lot of time learning how to analyze companies in a way that makes sense and actually can forecast the future price of a company.
When it comes to trading, which is what we focus on here at The Robust Trader, it’s something that generally takes much more time to execute. Some trading styles will demand constant monitoring, which turns it all into somewhat of a full-time occupation. However, the profit potential could generally be said to be higher than that of passive investing.
Let’s expand a little more on the three main types of trading, and the steps you should take to learn any of them!
Related reading: How Do Stocks Make Money?
Related reading: How Do Traders Make Money?
How to Learn Trading the Right Way
Trading provides great profit potential when carried out in the right manner, and therefore attracts the attention of many people! Here are the three major approaches that we deem be viable options:
- Swing trading is the best option for beginners in trading. In short, it’s defined by its medium-term holding periods, which may last from one day to several weeks. This comes with the benefit that you don’t have to spend that much on the execution of the trade signals. It’s enough to just go through your list of stocks when the market has closed, and place orders for the coming day!
- Daytrading is the trading form that’s most popular among beginners, and that we receive the most questions about. Daytraders close all their positions before the close of the trading session, which means that they don’t bear any overnight risk. However, daytrading is much harder than swing trading, and should not be attempted without any previous experience.
- Algorithmic Trading is when you let a computer trade your strategies for you, be it daytrading or swing trading strategies. According to us, algo trading is the trading form of the future, and is what we are the most passionate about!
If you are new to trading, you should definitely go with swing trading. It’s the trading form that gives you the best chances as a beginner and that lets you try out trading to see what you think.
Learning Trading: Step By Step
Here are the steps you need to take to stand a chance in the markets:
- Find your trading strategy: Although you know what trading form you are going to focus on, you still have to come up with the trading strategy. This is the most arduous part of trading, and will require many hours of research.
- Validate the strategy: You may think that it’s over when you have found something that looks alright! However, now you need to find a way to validate that what you found actually works going forward!
- Figure out your position size: Finding out how much you should risk on every trade is crucial in order to remain in the game for longer periods. Risk too much, and you risk wiping out your account. Risk too little, and you might not get any returns that are worth the effort.
- Learn Trading Psychology: Most people don’t realize that the crucial link between their trading strategy and the results they want, is themselves. As such, you need to make sure to learn about the psychological challenges that traders face, in order not to fall victim to your own inner demons.
If you find that it all would take too much time, you could simply take a trading course that will give you a proven method you may implement at once.
People indeed are making money in the stock market and other financial markets, and as you have seen in this article, there are many ways you could go about to make money on your own!
If you want to fast track your learning experience and get going quickly, we recommend that you have a look at our trading courses!