Best Stocks to Invest Cash
Have you ever wondered how to make money on stocks? If yes, then this is the right question. After all, stocks are one of the best ways to create wealth and passive income. Ironically, despite this, many people are afraid of the stock market and hesitate to start investing. They fear that investing in stocks takes a lot of time and money.
We will debunk these myths and hopefully convince you that investing in the stock market is not only a good idea, but also a great opportunity to increase capital. In addition, we will give you a simple guide that you can use to start investing in stocks and start making money.
We will take the US stock market as an example, since it has the best choice of instruments and has shown fairly steady growth over many decades.
Why Are Some People Afraid to Invest in Stocks?
Let's first dispel the myths that make a lot of people hesitant to buy stocks. These myths lead to money getting stuck in bank accounts that offer very low returns and do nothing to increase wealth.
Here are three myths that we will try to debunk:
- Earnings on stocks are only for the rich. An investor needs a lot of money to successfully trade stocks.
- Making money on stocks is too difficult for a novice investor.
- Earning on stocks takes a lot of time.
Myth 1. Making money on stocks is only for the rich.
There is a widespread myth that only wealthy people can make money on stocks. This is partly because people associate investing in stocks with billionaires like Warren Buffett.
But did you know that these investors also needed to start somewhere, and many of them didn't have huge amounts of money when they started? So how do you invest in stocks if you don't have a lot of money? Let's take a look.
Warren Buffett believes that it is better for beginners to start investing in stocks with the help of index funds. Therefore, you should consider investing in ETFs (Exchange Traded Equity Funds).
What is an ETF? In simple terms, it is an exchange-traded fund that invests in stocks from stock indices or certain sectors of the economy. Buying a stake in an ETF is as easy as buying a common stock. In addition, they are usually inexpensive.
A simple example. Suppose there is an ETF that invests in the top 10 stocks of the S&P 500. Let's also assume that this ETF has 10,000 shares. This means that the owners of the parts in the ETF collectively invest in the shares mentioned above. In other words, with ETFs, investors pool their capital to invest in a basket of stocks.
The main advantage of this approach is that it increases diversification, which is an excellent risk reduction strategy. Also, because you don't invest in individual stocks, you often save a lot of money in commissions.
However, the benefits of investing in ETFs don't stop there. When it comes to profits, ETFs are also one of the best investments you can make. For example, one of the most popular Vanguard S&P 500 ETFs available is up 30.5% in the last year (as of 8/26/2022) and 155.97% in the last five years. This means that if you had invested $1,000 in this ETF back in 2016, you would already have $2,559.
Let's also consider how many US stocks or ETFs can you buy with just $1,000. As for stocks, let's look at some popular companies and how many shares you can own:
Apple (APPL) – currently trading at around $149 per share, so you could buy 6 shares.
Alphabet (GOOG) – Google's holding company is currently trading at around $2,821 per share. Think the budget won't allow it? This is not true. After all, some brokers, such as Interactive Brokers, offer to buy fractional shares, so you can own just over one-third of the share.
Netflix (NFLX) – currently trading at around $550 per share, so you should be able to buy one share.
Nike (NKE) – currently trading at around $169 per share, so you should be able to buy 5 shares.
Microsoft (MSFT) – currently priced at around $303, so you should be able to buy three shares.
Tesla (TSLA) – currently trading at around $707, so you should be able to buy one share.
Visa (V) – currently trading at around $235, so you should be able to buy four shares.
From the above, it can be seen that you can easily invest in some well-known companies with as little as $1,000 available, and in some cases even less. However, keep in mind that these are only approximate prices and may change.
With ETFs, the situation is no different. For $1000 you can buy:
Two stocks in the Vanguard S&P 500 ETF – replicates the structure of the S&P 500 index.
Five shares in the ETF SPDR Gold Shares – invests in gold.
Two shares in the Vanguard Information Technology ETF – invests in leading technology companies.
14 shares of iShares Core Aggressive Allocation ETF.
Nine shares of the iShares MBS ETF.
12 shares of iShares S&P 500 Growth ETF.
Myth 2. Making money on stocks is too difficult
The next myth related to stock trading is that it is too difficult for the average investor. It arose because ordinary retail investors compare themselves to professional investors and fund managers.
Of course, on a professional level, making consistent stock returns and managing large portfolios can be challenging. That is why professionals have the necessary qualifications and experience that allow them to acquire the necessary skills.
But do you need a special education if you want to invest only your own money and provide yourself with additional income? No. In fact, you can learn the basic principles from two or three good books on investing to get started.
Myth 3. Making money on stocks takes too long
The myth is that making money in stocks just takes too long. You can't seem to be successful in stock trading and investing unless you quit your job and dedicate all your time to trading. It's just not true.
In fact, with strategies such as long-term investing and swing trading, you can make money on stocks and not spend a lot of time. Let's take a look at some of the approaches you can use:
Swing trading. In swing trading, the investor seeks to capitalize on medium-term trends in the price of a particular stock in order to make a profit. Transactions usually last from several days to several months. Let's take Microsoft stock as an example.
Long term investment. Take, for example, the Vanguard Information Technology ETF. Its price was about $317 per share in August 2020. In August 2022, it rose to around $422 per share. This means it is up 33% and if you had invested $1000 you would now have around $1300. In 5 years you would earn 258%. At the same time, you would not need to trade a lot and actively to achieve such a result.
Transfer of money to management. Here you will transfer your money to a financial advisor or fund manager. As a result, you rely on the skills and experience of the pros to turn a profit without having to do anything.
Robo advisors. Similar to financial advisors, robo advisors allow you to invest effortlessly and effortlessly. The difference is that these are digital automated platforms that do not require much human control.
How to Make Money in Stocks: A Beginner's Guide
Now that you've convinced yourself that it's actually possible to make money in the stock market without spending a lot of money or spending a lot of time managing your investments, it's time to show you how. By following these instructions, you will be able to start working without difficulty.
Step 1. Find the right broker. While at first you might think that you can use any broker, there are pros, cons, and differences between brokers that you need to consider. Ideally, you should consider a broker that offers you a demo account to practice, lower fees, and lower minimum deposit requirements.
Step 2: Choose a strategy. The next step is to choose the right strategy that suits your goals, risk appetite and amount of time you want to spend managing your investments. For example, in swing trading, when you are looking to profit from the movement of stock prices, you can make good profits if you catch the trend early. However, in a sideways market, or in other words, when there is no trend, swing trading is not as efficient and can lead to losses. Conversely, if you invest in ETFs long term, you avoid most of the volatility, which reduces risk, but you also often make smaller returns.
Step 3: Fund your first deposit. Before you can trade, you need to make your first deposit.
So how much should you deposit? As with the strategy you will use, the deposit amount will depend on your specific investment objectives and risk appetite. One recommendation, however, is that you should not invest money that you don't want to lose. You should not invest money that you need for other purposes or money that you have borrowed. Also, another good idea is to gradually increase your investment over time, not only to increase profits but also to reduce risk by averaging out dollar costs.
Step 4. If you want to significantly increase your profits over time, it is very important to know how compound interest works. This concept is simply the process of reinvesting any profits you make. Let's take a simple example to illustrate this. Let's say you invest $1,000 and you can earn 10% a year on your investment. As a result, in a year your total profit will be $100. Now, if you reinvest $100, your capital for the next year will be $1100, which means that your second year profit will be $110 at the same rate of return. If you continue to do this, you will see exponential growth in your investment.
How Much Can You Earn From Stocks?
How much you can earn in stocks depends on many factors, including market conditions, your strategy, and the amount you invest.
Let's look at some expected results. We covered the Vanguard S&P 500 ETF above, so let's take a look at the iShares Core S&P 500 ETF. Here, you could make a total return of 297.01% over the past 10 years. This is an average of 14.78% per annum. So, if you invested $10K 10 years ago, you would have $29.7K now.
Similarly, the average stock market return over the past 100 years is 10%. Although this is not a lot, keep in mind that at this rate of return, you will double your investment in 7 years.
What Risks Should Be Considered?
Generally, when investing in the stock market, you face some of the following risks:
- Price risk. As the name suggests, you will always have the risk that the market will turn against your investment. This can, for example, happen when the market as a whole crashes, or when investors buy stocks in trending companies, leaving good companies behind.
- Economic risk. There is a risk that the economy as a whole will affect your investments, such as during the 2008 financial crisis.
- Inflation risk. Inflation causes prices to rise and the value of a currency to fall. Thus, inflation risk is the risk of losing the value of your investment over time.
While most of these risks are beyond your control, your strategy and the approach to risk management that you adopt are under your control. In other words, you can use the right strategies to mitigate these risks, for example by diversifying your investments.
Buying shares is one of the best ways to invest money and build wealth over time. Unfortunately, many people do not invest because they are afraid to do so. They need to understand three simple truths:
- You don't need a lot of money to make money in stocks.
- You don't need much time to earn on stocks.
- Making money in stocks is not too difficult.
Now you have a simple guide that you can follow to start investing in the stock market and potentially make good profits from it.