One way to make money in the stock market is by trading shares for a profit. To make money in the markets this way, you need to make consistent gains repeatedly and have a trading strategy. Financial markets exist for companies to raise money but you can make money in the stock market if you know how.
In this article, I will provide you with everything you need to understand how you can make money in stock trading, consistently.
How to make money in the stock market with little money
It is true that you need money to be able to make money. One drawback of the stock market is that commission fees can make stock market activity unattractive.
Several brokerage accounts have offered ‘freemium’ models with free commissions. But the true cost of these shows up elsewhere. I wouldn’t recommend to use brokers such as Freetrade and Trading212 because the service and quality of execution are much poorer than the higher-priced brokers.
Instead, one option is to invest in passive index tracker funds. These are low cost and don’t require significant investments in order to get your stock market journey started.
Individual stocks require commissions on every deal, so a buy and a sell will cost you two commission charges.
How to automate stock market buying
To automate your long-term stock market buying you can simply set up an instruction with your bank in your broker to purchase the same monetary amount in a fund every month which should be commission-free.
This has the benefit of dollar-cost averaging, a term used to describe the smoothening of the average price over time.
For example, let’s say you are adding £500 each month to an index fund. In month one, the fund price is 100p and therefore your automatic purchase is 500 units. However, in month two the price is now 120p and so the automatic purchase is 400 units. But if in six months the market crashes and the price is now 50p, that means the automatic purchase will be 1,000 units.
Should I buy index tracker funds or individual stocks?
The beauty of ETFs and index tracker funds is that they track the market and do not require active participation on your part. Passive investing in the stock exchange has many advocates.
However, picking your own stocks can lead to outperformance in the market. For those that are willing to take on extra risk and put in the time the rewards can be far higher.
You must make a decision on whether you want to pick your own stocks because if so then it requires time to research and understand a company and its industry.
There’s nothing to stop you from investing in index tracker funds such as the FTSE and S&P and picking your own stocks!
Should I buy mutual funds?
A mutual fund is an actively managed open-end investment fund that takes outside capital to purchase assets such as stocks and bonds.
In short, you deposit your money with a fund manager and his recommendations to beat the market.
However, very few money managers beat the market. Despite this, fund managers are earning money even when the fund loses money!
In my opinion, you should either pick your own stocks or put your money in passive low-cost index trackers. An investment advisor is unlikely to recommend this because they won’t receive the commissions from clients with a high allocation in low-cost trackers or robo-advisors.
Both mutual funds and index trackers are available to buy in your brokerage account.
The dangers of stock market investing
The response to the global pandemic in 2020 was to pump more money into the system.
Employees’ wages were paid on furlough and businesses were given loans, in order to prevent an economic collapse.
This has led to huge numbers of beginner traders and investors getting involved in the stock market as they are sat at home bored. The strength of the market rally in 2020 and early 2021 has put money in the pockets of many new traders.
But the stock market is filled with danger. Not every market recession sees a huge bailout. Stock prices don’t always go up.
It is possible to make money in the stock market through discipline and consistency. Here is a step-by-step walkthrough on how to get started.
How to get started in stock trading
- Educate yourself about the stock market
- Define your goals in the stock market
- Become a risk manager
- Build your stock market business
Let’s dive deeper into each of the bullet points…
1. Educate yourself about the stock market
It’s important that you understand enough about the stock market to know the nature of the game you’re playing.
For example, many new investors become so enamoured with a story they don’t bother to check the financial statements.
You wouldn’t buy a car without checking under the hood – so why should it be any different when buying a stock?
You can educate yourself with my free trading ebooks and my step-by-step walkthrough articles here:
- How to research stocks
- How to value stocks and businesses
- How to understand a balance sheet
- How to read an income statement
- How to analyse the cash flow statement
- Understanding private placements
- How to read RNS announcements
Once you have read these articles and understand the concepts then you will have a good grounding in understanding how to value stocks and read the financial statements.
2. Define your goals in the stock market
Everyone has a goal or an ambition. It may just be considered a dream and unrealistic, but everyone has them.
Whether it’s to quit working and become financially independent, or to give your children a better future through schooling, or to take your partner on a world cruise – these goals are all tangible and they are all achievable.
Becoming specific in what we want will not only give ourselves a goal to aim for but it will help to motivate us when completing mundane tasks or when the market is not bearing much fruit.
There is a trick I learned from neuro-linguistic programming. It’s simple and yields powerful results.
The next time you find yourself struggling to stay motivated or are tempted to skip the next trading day, or even keep our trading areas tidy, you must think about the bigger picture.
Think about the end result, not the activity itself. Completing our journal will teach us something new about the day, which is one day closer to our goal. Going over our charts may find us an excellent trading setup, that we otherwise would have missed. Tidying our work desks will mean we have a stress-free and calm feeling.
Achieving these all help to progress us towards our goals; acknowledging that small tasks are active steps towards what we really want is a powerful technique to motivate ourselves and keep the bigger picture in sight.
Get specific about your goals
Defining your goals is a great start, but you need to get specific about them. When do you want to become financially independent? How much do you need to put your children through school? Which cruise would you like to go on and in what year? Once you have these answers, what do you need to do to achieve them?
When we have an idea of what we need to do to achieve them, the overall picture can be broken down into smaller goals and milestones. It also makes the goals real.
Systems for goals
Goals are great, but it’s now time to focus on the process itself. This is ultimately what will drive us there, and our successes and failures depend entirely on the quality of our systems and processes.
The concept of marginal gains is well known about in sports such as Formula 1 and cycling, where tiny improvements are made everywhere in order to cumulatively compound and produce a bigger gain. Even the bedsheets are tested to optimise sleep!
Defining our goals and getting specific about them now provides us with the motivation and clarity to show they can be and how they can be achieved.
It is hard to believe but getting 1% better each day makes us 3,678% better by the end of the year. If you don’t believe me then type 1 by 1.01 to the power of 365 into your calculator. Little things add up.
3. Become a risk manager
It is tempting to think of how much money you can make in the stock market when starting out. I know, because I did.
Rather than thinking about how much you can make, instead focus on how much you can lose.
Amateur traders think about how much they can make.
Professional traders think about how much they can lose.
By becoming a risk manager you are relentlessly focused on risk tolerance through managing your downside and instead keeping the risk to the upside.
Think about it: returns are the only thing you cannot control.
But you can control your entry, your exit, your position sizes, your psychology, your trade management.. Yet many people focus solely on returns.
There are several things that need considering:
- Your max loss on trades
- Your maximum account drawdown before you stop trading for a reset
- Your backup internet
Having contingency plans for when things go wrong can prove to be to be time well spent by preparing in advance.
Are you a trader or an investor?
Deciding what you are before building out your stock market business will help you overcome the inevitable decisiveness.
If you’re a trader, you have to realise that you will miss out on bigger moves as you’re taking profits on a much shorter term.
If you’re an investor, you have to accept that you will miss out on short term trends as a sacrifice for capturing a larger move.
Far too many people call themselves investors yet sell when they’re up 20% in a stock. But when another stock falls 50% – they’ll stick to being investors.
Emotions tempt us into cutting our winners in order to prove our ego right. We are risk-averse with winners but risk-seeking with losses.
It is widely regarded that concentration is the builder of wealth. But it’s also the destroyer. Diversification is one of the few free lunches in investing and shareholders should embrace it in their portfolios.
Furthermore, if you’re a trader then you need to specify what type of trader you are. Will you be a scalper, a breakout trader, a short selling trader? Momentum trader?
If you’re an investor will you be growth investing? Value investing? Are you investing for dividends?
Defining your trading and/or investment strategy clearly will help you to focus on your goals.
4. Build your stock market business
We should now have the foundations to get started building our stock market business.
You should’ve taken the time to:
- Educate yourself about the stock market (my book will help you to do this – click the button below)
- Defined your goals specifically and worked out what is needed to achieve them
- Created a routine and/or systems to stick to so you stay on track
- Identified your strategy as either a trading-based strategy or an investment-focused one
Trading is a business and therefore it should be treated like one.
You can treat trading as a hobby if you wish but if you want to profit consistently then you should be aware of the key differences between hobbies and businesses.
In your trading business plan you should be able to detail several aspects:
How you will trade the stock market
For example: I will trade breakouts from 52-week highs with a position size of no larger than 10% of my account.
I will try to make 20-30% with stop losses of 10-15% and compound the account.
Your maximum loss on any trade
For example: My maximum loss on any trade will be no more than 5% of my total account.
This means I am never at risk of blowing myself up and losing significant amounts of capital in one trade.
How you will find trading opportunities
For example: I will use SharePad in order to filter for stocks trading on large volume and stocks that are closing in on 52-week highs.
I will then set alerts on SharePad/my broker account so that when the price is almost at the breakout point it lets me know so I have time to buy.
How start making money in stocks
Now that you’ve built your stock market business plan it’s time to start putting it into action.
Find an idea, test it, execute, and refine.
You should be able to find an idea as defined in your plan. You should be able to test it to see if it historically has worked.
If it has, then it’s time to execute. Once you have a book of trades you can then begin to analyse the data and refine your process.
This should be a constant process for anyone who wants to make money in the stock market.
Download the free ebook now
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Avoid lifestyle creep to make more money in the stock market
One big killer of trading accounts is the goal of keeping up with the Joneses.
People take out loans and credit cards to buy things they don’t need, with money they don’t have, to impress people they don’t like.
Lifestyle creep is the silent killer of independence.
As your salary goes up, it’s likely your lifestyle and living expenses go up too. If your expenses rise in tandem with your salary, then it means you’ll never have enough money at the end of the month in order to put to work for you.
Financially independent people pay themselves well.
Here’s an example of someone who increases their lifestyle with every salary increase:
At the end of every month there is the same amount of capital left over after everyone else has been paid. This includes mortgage, cars, bills, lifestyle increases.
No matter how much the salary increases the amount with which is left over to pay yourself is always the same.
Now consider someone who keeps their lifestyle the same:
We can see that even though the salary increases, this person keeps their lifestyle exactly the same and has much more free capital left over to pay themselves at the end of the month.
This capital is invested in the stock market and starts working for this person, rather than paying other people. Eventually, this capital will grow so big that the person no longer needs to work and is financially free.
You don’t need to be like this person and never enjoy any improvements in lifestyle, ever.
But you should always be wary that every £ paying someone else and not yourself is costing you exponentially.
How to make money trading stocks at home
Trading stocks from home requires a disciplined routine.
If you are going to trade on a full-time basis then you should ensure that you’re adequately funded. Traders starting with small amounts of money place huge pressure on themselves to succeed.
As a minimum, you should have at least a year’s worth of capital set aside so you are not under pressure to earn money to pay your bills and earn a regular paycheck. If in doubt, seek financial advice.
It’s important to acknowledge that most traders lose in the long run. The failure rates here are high. It’s not as easy as “buy low, sell high”. If it was, everyone would be doing it.
By investing in a basket of stocks with high management ownership and solid fundamentals you increase your chances of making money through picking your own investments.
Growth stocks have done well in the last decade but like anything, there is never any guarantee that a stellar past performance will lead to high total returns.
Here is a four-step pointer to make money trading stocks at home:
- Pick a technical analysis provider (I use SharePad)
- Decide which asset classes you are going to trade (I trade only equities)
- Analyse past volatility and create a strategy to capture moves (my breakout guide will show you how to do this)
- Use an ISA to protect your capital gains from HMRC!
The bottom line when it comes to stock trading is risk management.
If you can master that, the upside looks after itself.
Three mistakes that stop you from making money trading in the stock market
There are many common errors from new traders in the stock market.
Here are three that will constantly try to trip you up.
1. “I’ll move my stop loss lower”
You set your stop loss or max loss on the trade for a reason. Stops are there to protect you from doing anything stupid – like letting a losing trade run.
One common mistake from traders as well as moving their stops lower is to decide to hold on for the “breakeven trade”.
This is where the trader’s ego is more important than their money and to protect their feelings from getting hurt they will try to sell out when the share price reaches “breakeven” so they don’t have to realise a loss.
This is how amateurs think because they don’t know any better. Those who treat trading as a business know that this thinking is not only illogical but detrimental to a P&L.
2. “This stock looks good so I’ll go big”
Another common error for rookies is to become overconfident or become seduced by a stock. They fall in love and decide to go in large.
A diversified portfolio and trading account is required at all times. When a trader loses control of their risk management then it is a slippery slope to large losses.
This is because even if the trade is successful, then the trader receives positive feedback that trading oversized positions is the way to faster profits.
They’ll then be sure to trade an oversized position again until they eventually lose.
3. “I need to make money every day”
A final trading trap for new traders is that they think they need to be in the market and buying and selling on a daily basis.
The quote above refers to holding stocks that are big winners. Being right on a stock and riding a winner can make a huge difference to your P&L.
One big win can pay for a lot of small losing trades.
But sitting tight on your capital is also an excellent strategy if there is nothing to trade.
You don’t need to trade constantly. This isn’t a job where you’re paid for producing more actions. Trading is a job that pays on results. And if getting good results means you need to sit out of the market for a few days or even weeks, then so be it.
It doesn’t do any trader any good to churn their account and spin their wheels. All that will happen is the trader becomes psychologically battered and the account is slowly depleted due to churn and trading commissions.
Bull markets make paper millionaires.
You don’t need to be clever to make money in a bull market; the only requirement is that you are long.
But when the market changes, many market participants do not have adequate risk management controls in place, and they hold onto their losing positions way longer than they should.
Eventually, they reach the point where the pain is too great and they sell out. Desperate people sell cheap.
Trading offers everyone the same opportunities.
It is a meritocracy in its purest form – the stock market does not care for age or race, gender or class.
It doesn’t care how much money you have or how much money your family was born with.
If you want to better your circumstances and offer your family wealth and security, or even generate a second income independent of your career, then there is no better place.