Many beginning investors are wondering the same question: how can you get rich buying stocks? Well, how does a person get rich with anything? They develop a game plan, meditate on it and then take action. Stocks work the same the same way, although you do need to think about whether you want to make money for the short term or the long term.
Developing a Gameplan – Your First Step to Getting Rich with Stocks
If you want to get rich with stocks, you need to think about how much money you plan on investing in mutual funds. Afterward, you need to think how much liquid cash you want on hand for stock investments.
This is a very important step, as most investors spend up all of their money when the market is good. However, even when the market is bad there are winning stocks… sometimes even more so. But if all of your funds are already gone, you cannot take advantage of these gold mines.
Identify a target to sell while also defining your stop loss
If you want to limit your losses, make sure you define your stop loss. This is an arrangement where stocks are sold after hitting a certain price.
Buying Stocks for Long Term Investing
Some stocks will be profitable over the long haul. These are the ones you want to keep in your portfolio for maybe five or ten years. At the end of that period, you will make tens of thousands.
In addition, include a few high-risk stocks. These are the ones that are not doing so well today, but may turn out to be profitable in the future.
Getting Rich with Mutual Funds
When it comes to mutual funds, you will want to stick with systematic investment plans. By doing so, you can benefit from the power of leverage. But this is assuming you back up your plan with a withdrawal strategy… selling your mutual funds after you have reached a certain amount. You can then use the proceeds of your sale for stocks or another type of mutual fund… ones that are fixed income.
Gold has always been a valuable commodity. And even now it can make you a millionaire if you play the game right. To do so, you must realize that gold and stocks run opposite from each other. Therefore, you should invest in gold mining stocks. Gold ETF is an example. It is a gold-based mutual fund specifically designed for the commodities investor.
Consider Being Contrarian
A good investor does not always go with the flow. Warren Buffet is an example. Unlike many investors in the 90s, he did not put his money on Internet-bases stocks. As a result he did not lose like so many others during the dot com crash.
Two additional concepts every investor should know:
Power of Compounding
Compounding occurs when you reinvest the interest you gain from your previous investments. For instance, if you invest one thousand dollars, and you receive ten percent interest on the principal, you will get one hundred bucks interest in a year. If that interest gets reinvested, the next year you would end up with $1,110, allowing you to earn $10 more in interest. If you can stick to this plan, you would double your funds every 8 years.
Even Albert Einstein commented on the power of compounding. He felt it was mankind’s greatest idea, as it allows him to accumulate wealth in a systematic way. Indeed, if Einstein thought compounding was a decent strategy, there must be something to its magic.
The concept becomes even more effective when you remain disciplined.
In any case, to get started with compounding, set up a series of accounts where fixed amounts get deducted from your account.
Dollar Cost Averaging
When you use a fixed amount to pay for an investment, you are engaging on a unique type of averaging. In the investment world, it is known as “dollar-cost.” People that engage in this strategy spend more when stocks are down and less when they are not doing well. For example, say a person invests $500 each month for $50 stocks. During their first purchase, they buy ten shares. If the stock rises to $62.50 next month, you would only purchase 8 shares. But if the stock falls to $41.67, you would get twelve shares, (minus the transaction fee).
Setting up regular investing mechanisms is relatively easy. It does not matter if you are investing in stocks or mutual funds, as the dollar-cost strategy works the same. If you use the strategy for stocks, you can apply it to individual shares or more unique arrangements. The exchange-traded fund is an example.
So, how can you get rich buying stocks? Use your head and develop a strategy that meets your financial goals. Most importantly, never invest more than what you can afford. While stocks can be very lucrative, they are still a gamble. Do not take this gamble if you cannot afford to lose what you put in. In other words, view your stock investment funds as “fun money.” If you have no problems spending your funds at a restaurant or even on a vacation, then that amount should work well with your budget, (as you are not expecting a return). By using this approach, you will not be disappointed when or if the market fails. And when it is successful, you will feel even more proud of yourself, as no other “fun” purchase can generate extra income.