How To Make Money Through The Stock Market?
A guide to Stock Index and Exchange Traded Fund Investing for “Newbies”
Someone’s sitting in the shade today because someone planted a tree a long time ago.
By James Spurway
Learn to make money in the stock market… like Warren Buffet?
You know, the guy that is CEO and the major shareholder of a company called Berkshire Hathaway, Inc. Since 1970 he has made a name for himself by following one strategy to make money, investing in the Stock Market.
Why has he been so successful for so long? His company focused on long-term earnings, not short-term price trends, and they never bought stocks that were overpriced.
Can you be the next Warren Buffet?
There may never be another Warren Buffet. He is an anomaly. However, with a disciplined approach and the right mindset, you can make money from the stock market? Where would Warren Buffet invest his own money if he were building a retirement plan (IRA, 401k, 403b)? Stock Index Funds!
A Guide to making money on the stock market.
What is a Stock Index?
Before we can talk about how to find and choose an Index Fund, we should first go back to basics. An index is really an artificially created list of stocks that an expert or panel of experts believes represent outstanding long-term share price growth potential.
Most of us, even those that have never invested in the Stock Market, have heard of the Dow Jones Industrial Average, otherwise known as the Dow Jones Index or DJI for short.
This index includes the shares and hence share prices of thirty (yes 30 only) American companies from strategically important business sectors. Hence the price that the DJI trades at reflects the economic health of Corporate America. If the 30 companies in the Index are reporting good growth and profits, their share prices will be rising, and the price of the index will also rise, and the same thing happens in reverse when things are not going well.
Other widely quoted Indexes are The Dow Jones Industrial Average (or DJIA), the Standard & Poor’s (S&P) 500 and the Nasdaq-100 in the United States, the TSX-60 in Canada or the FTSE Index in the United Kingdom.
Why is Index Investing a sound investment strategy?
For two main reasons. Firstly, by investing in an Index, and not in the underlying stocks that make up the index, you are minimizing the chance of loss, because it’s statistically harder for 30, 100, or 500 companies to make a loss in the same year, as it is for one.
If you invested in one company, you have a 50:50 chance that the company will make a profit in line with what the market expected, and hence experience an increase in demand to purchase, and an increased share price.
That’s not much different to gambling. Head’s, you win. Tails, you lose! Secondly, unless you have a securities, banking, fund management or brokerage business training.
The average laptop investor does not have the requisite experience to be engaging in the stock market share trading activity, even if there are a lot of people out there who will gladly take your money and tell you otherwise.
How to make Money through the Stock Market?
So can you buy a “share” in an Index?
No. However, you can create an exact copy of the index by buying the exact number of shares of the underlying 30 companies. The question is – why would you want to? Unless you want to give up your day job and become a Fund Manager, there is a lot of time and money that you need to invest.
If you like the idea of investing in an Index, you can open a securities or brokerage account and ask your broker to purchase units in their product that tracks that particular index.
There are also now tailor-made investment vehicles that you can invest in called Exchange Traded Funds, or ETF’s. An ETF is a Mutual Fund that trades like a share or stock during the day, rather than being priced at the end of each day’s trading.
These days, by investing in a specific exchange-traded fund, you can own the stocks in the Dow Jones Industrials without buying and holding each individual stock.
One such ETF that has gained popularity is the Dow Jones Industrials ETF. The strategy of this ETF is to emulate or replicate the performance of the DJI by owning equal numbers of all the shares in the index.
You can buy or sell shares of the ETF simply through an order online or on the phone, with a single commission charge.
More importantly, with the shares of the DJI ETF trading for just $227.00, it’s a lot cheaper to use the ETF than to invest multiple thousands of US Dollars to buy shares of all 30 components individually.
What is the best way, how to make money in the stock market?
Which ETF should I buy?
How long’s a piece of string – right!? You might like chocolate cookie crisp ice-cream and I might like stracciatella! It’s all ice cream. Probably more important than which ETF should you buy is the question, am I making this investment for the right reason.
ETF’s are not the right investment strategy if you are trying to make a quick buck. They are not the right investment strategy if you like to play Fund Manager and have to be the one calling the shots and making all the decisions.
They are the right investment strategy if you’re just starting out, and have never made investments or owned an investment portfolio, however, are equally as appropriate for someone who is starting late in life to create an additional nest egg or buffer for those retirement years.
(note: the author is not an investment planner and it is always recommended to seek the advice of an investment professional when it comes to establishing a retirement plan that generates the income that you require).
Make Easy Money on the Stock Market.
What is the minimum amount I can invest initially, and when I top up the investment?
Here’s a little-known fact about ETF’s that put’s this question in perspective. According to information from a company called Vanguard, the largest supporter of ETF’s globally at this time, the median participating balance of one of its retirement accounts was around $30,000.00 Compare that to the minimum investment that is required to enter into an investment with a Fund Manager.
Many adhere to a minimum investment of $500,000.00 and in a lot of cases, it may be $1,000,000.00.
You need to conduct thorough research on the issuer of the ETF, as well as the sector or sectors that the ETF tracks (follows). In most cases, you can open an account with a broker or securities house and invest as little as $100.00.
The conclusion: How to invest in the stock market.
Mindset is key to a successful investment. It is important to take a long-term perspective when making a decision. Individual investors can try to emulate stock market index (indices) returns by buying the same ratio of the same underlying stocks that the index (indices) contain.
Individual investors can try to emulate stock market index (indices) returns by buying the same ratio of the same underlying stocks that the index (indices) contain.
Whilst there is some merit in doing that, not the least of which is the saving in fees, it requires a considerable investment of time and money.
One alternative has emerged. It is an asset that is a bit of a hybrid. It looks like a Mutual Fund but acts like a Stock. It’s called an ETF, or Exchange Traded Fund.
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