How to Earn Money from Stocks: A 5-Step Guide

Earning money from stocks is generally not about quick riches. Instead, it involves a strategic approach and a focus on long-term growth. This guide outlines key steps to help you navigate the stock market to know how to make money in stocks successfully. We'll explore essential strategies, from setting up your investment foundation to understanding market dynamics.

For those in Singapore looking to profit from stocks, several avenues exist to consider. You can learn how to make money in stocks by opening a brokerage account to trade individual stocks or invest in stock-based funds like Exchange-Traded Funds (ETFs). Effective strategies include the "buy and hold" approach, focusing on dividend-paying stocks, and exploring emerging market sectors.

To begin your journey in making money in the stock market, you'll need a brokerage account. Think of it as a gateway to the stock market provided by a licensed financial institution in Singapore. Through this account, you can buy and sell stocks, ETFs, and other investment products.

Beyond a standard brokerage account, consider leveraging other types of investment opportunities, including tax-advantaged options. In Singapore, the Supplementary Retirement Scheme (SRS) offers tax benefits, allowing you to invest for retirement while reducing your current taxable income. While a regular brokerage account is suitable for general investing, the SRS can be a valuable tool for long-term retirement planning and tax optimisation.

>> Read more: What is a brokerage account and how to set up one

For those wondering how to make money in the stock market, investing in stock funds often presents a more accessible and potentially rewarding approach compared to selecting individual stocks. Stock funds, such as index funds and Exchange-Traded Funds (ETFs), pool investments across numerous companies. This diversification is a key advantage. For instance, investing in a fund that tracks the Straits Times Index (STI) allows you to gain exposure to a broad selection of leading Singaporean companies. Similarly, global funds like those tracking the S&P 500 offer diversified exposure to major US corporations.

This strategy simplifies the process of how to earn money from stocks. Instead of needing in-depth knowledge about each company, you gain broad market exposure with a single investment. Furthermore, funds significantly reduce risk. If you invest in only a few individual stocks, the poor performance or failure of one can severely impact your portfolio. However, with funds holding hundreds of stocks, the impact of any single company's underperformance is minimised, contributing to a more stable investment journey.

While achieving higher returns might seem possible by carefully selecting individual stocks, it demands substantial research, analysis, and active management. The potential for greater profit is accompanied by a heightened risk of loss. Therefore, for many Singaporean investors, particularly those new to the market, stock funds offer a prudent and efficient way to gain money from stocks.

>> Read more: What are index funds and mutual funds

A cornerstone of how to make money in stocks is adopting a long-term perspective. Financial professionals often emphasise that your time spent in the market is crucial in determining your overall investment success. The "buy and hold" strategy embodies this philosophy: you acquire stocks or stock funds that you believe will appreciate in value over an extended period and then hold onto them, weathering market fluctuations.

Historically, the stock market has delivered average annual returns of around 10%. While this figure is not guaranteed and can vary significantly year to year, it generally surpasses the returns offered by traditional savings accounts or fixed-income instruments like bonds. However, many investors fail to realise this potential because they attempt to time the market, frequently buying and selling based on short-term market trends. This often leads to stock strategies that miss out on crucial periods of market growth.

It's crucial to remember that how long it takes to make money from stocks is not a short game. Financial advisors typically recommend investing only money you won't need for at least five years. This timeframe provides a buffer to ride out market downturns and allows your investments the opportunity to recover and grow. Market volatility is inevitable, but long-term investors are better positioned to benefit from the overall upward trend of the market.

Ultimately, the longer you remain invested, the greater the opportunity for your investments to grow. Successful companies tend to increase their profitability over time, which often translates into higher stock prices, rewarding long-term investors. Patience and discipline are key to how to earn money from stocks through the buy-and-hold strategy.

Another strategy to consider when exploring how to make money in the stock market is investing in dividend-paying stocks. Dividends are portions of a company's profits distributed to shareholders. Holding these stocks allows you to receive regular income, which can be particularly attractive to investors seeking a steady cash flow.

Singapore's stock market offers a variety of dividend-paying stocks. Companies in sectors like real estate investment trusts (REITs) and telecommunications often distribute dividends. Investors may consider stocks like those from Singtel or certain REITs listed on the Singapore Exchange (SGX) for dividend income. It's important to research the company's financial health and dividend history to assess the sustainability of these payouts. Investing in high-dividend-paying stocks or ETFs can be a viable strategy for how to gain money from stocks.

>> Read more: Best brokerage accounts in Singapore

To effectively profit from stocks, staying informed about emerging trends and industries is wise. Sectors like artificial intelligence (AI) and technology are currently experiencing significant growth, and companies within these sectors may offer substantial long-term potential. While individual stocks in these innovative industries can be volatile, they also present opportunities for significant gains.

For Singaporean investors looking to make money in stocks, it's crucial to conduct thorough research before investing in any new industry. Understanding the industry's dynamics, growth prospects, and potential risks is essential. One way to mitigate risk while still participating in the growth of these sectors is to invest in industry-specific ETFs, such as AI ETFs. These ETFs provide diversified exposure to a basket of companies within the industry, reducing the risk of picking individual winners.

When considering how to make money in the stock market, especially for beginners, it's crucial to be aware of common investing myths that can lead to poor decision-making. Unlike typical markets, the stock market often sees increased anxiety during price drops. This can trigger emotional responses that contradict sound investment principles. 

Understanding and avoiding these myths is key to achieving long-term success:

1. "I'll only invest when the stock market feels less risky."

A frequent mistake among new investors is delaying entry into the stock market until it seems "safe." This often means waiting for prices to rise after a decline, effectively missing out on the opportunity to buy low. While it's natural to feel apprehensive after market downturns, how long it does take to make money from stocks is often linked to being in the market during its recovery.

This hesitation is often driven by "loss aversion," a psychological tendency where the fear of experiencing a short-term loss outweighs the potential for long-term gains. Investors may prioritise avoiding immediate discomfort, leading them to sell stocks during dips or avoid buying when prices are attractive. Overcoming this emotional bias is crucial to consistently earning money from stocks.

2. "I'm going to wait for the price to drop before buying back in."

Another common pitfall is attempting to time the market by predicting short-term price fluctuations. Investors may delay buying, hoping for a further dip, but the stock market is inherently unpredictable in the short term. Prices can rise just as quickly as they fall, and waiting for the "perfect" moment can result in missed opportunities for how to gain money from stocks.

A more prudent investment approach, especially for those learning how to make money in the stock market with little money, is dollar-cost averaging. This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. By consistently investing over time, you smooth out your purchase price, reducing the impact of short-term volatility and mitigating the risk of investing a large sum right before a downturn.

3. "This stock isn't keeping my interest, so I'm getting rid of it."

A crucial aspect of making money in stocks is recognising that successful investing often requires patience and discipline. While the stock market can offer excitement, particularly with speculative or trending stocks, long-term wealth building typically involves holding onto quality investments for years, allowing them to grow steadily.

Chasing quick gains through frequent trading can be tempting, but it's important to acknowledge that consistently profiting from short-term market movements is challenging. While some traders achieve success, most investors are better served by adopting a buy-and-hold strategy. 

If investing triggers intense anxiety or fear, it may be beneficial to seek guidance from a qualified financial advisor who can help address any underlying emotional barriers to sound financial decision-making.