Wednesday, September 24, 2008

How to make money in the Stock Market

Making money in the stock market is similar to making money on your money in bank with interest being paid to you. It takes time, patience and lot of knowledge to make money in the stock market.

Many say stock market is a gamble, but it is actually more about your ability to see deep into the stock and realize when the stock will go up. The ones who say it's a gamble are the ones that don't make much money or randomly pick any stocks.

Generally people who are long term traders will make more money in the stock market. Long-term traders means long-term "stockers". They usually keep a stock for years and wait for it to grow slowly and steadily. Remember the quote here is "Slow and steady wins the race". You have to follow a similar strategy.

Why do long-term investors do good in the stock market? The reasons are because they pay one time commission fee. Whereas a short-term buyer and seller has to pay fees on every transaction which they do frequently, but the long term investors only pay the fee once because they don't make many trades. Another reason is because the stock grows more and might even make you a millionaire.

For example, it is easier for a stock to go from $1/share to $30/share in a matter of 4-5 years. But it is almost impossible for a share to go from $1/share to $30/share in a couple of months. It might go up a dollar or few cents, but it won't go too high. For that reasons the short-term investors make less profit and sometimes they are even is loss because of the commission fees that add up and low returns on investment.

So to make money in the stock market, you should buy a stock for long-term and hope to keep it in your portfolio for the next couple of years, unless you find that the shares will drop in prices or will not make you any gain then you need to sell it.

One thing that many beginner investors do, and which I did too was to buy the shares that almost everyone has heard of. For example, the Microsoft share is one of the first ones that are bought by people. Mainly because the company is well recognized and the share is not ever going to drop to an absolute value of $0 anytime in the near future so people feel comfortable buying those shares.

In order to make profit you need to something that others don't. Although the Microsoft share made some people millions of dollars from an investment of only $10,000, it is not going to make you the same money. The company has already reached a very high peak, and chances of it getting even more money reduce.

People who did make money by the Microsoft share are the people that believed in it when it first came in the stock market as a small company and wasn't well established. That is why you have to find newly starting companies with low share prices and see their profile, market rating, average profit/loss, maximum share drop, etc.

To make huge sum of money, one has to invest in something which has a huge potential to grow, and is at the bottom of its business career and is rising nicely to the top and will make a lot of money. An example of such a company is Net Gear. Net Gear is slowly rising and is one of the shares that I own right now. You don't have to buy it, but it is an example of how you can invest in something that is small and gain huge returns.

So here you have it. To make money in the stock market you need to be a long-term investor and invest a company which has potential to grow a lot more than its present state. But not to forget that some people also make money by selling and buying shares every week and don't keep shares for more than a month in their portfolio, and also that investing in a small company can be a risk. Take these precautions when first starting and start with a small amount of money so that you won't go bankrupt buying your first stock!

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