A common question that comes up before starting out in the stock market is, „How much money can you make with stocks?“ Of course, you would like to know what to expect when you take your money in hand and invest in individual companies or even funds. However, this question is not so easy to answer, as many different variables play a role in success on the stock market.
On the one hand, how much money one can make with stocks depends on the investment strategy chosen. Long-term investors can expect a return of between 7 and 10%. Professional day traders, on the other hand, aim for an annual return of at least 20%.
The development of the markets and one’s own research can also have an influence on how much money one ultimately earns with stocks.
Information to make money with stocks
- Stocks have an average return of 7 to 10% per year. This is, of course, over the long term (10 to 15 years).
- Over longer periods, the market almost always yields returns (10 to 15 years).
40% of the stock market’s gains usually come from dividends. - The longer you stay invested in the stock market, the more your money can „grow.“
- Solid returns compounded over time can have a powerful effect on your wealth.
- Small improvements in your returns can thus make a big difference in wealth accumulation over time.
- Individual investors may well outperform or underperform the market; depending on how they invest.
Making money with stocks - How do I invest?
There are basically two approaches to investing; growth investing and value investing. Growth investors buy stocks of companies that are expanding. This group of investors believes in the potential for price appreciation and is willing to pay more for a stock relative to earnings than a value investor. Some growth investors even speculate on companies that are not yet profitable.
Value investors, on the other hand, focus on the relationship between price and earnings per stock. For them, the focus is on the intrinsic value of the company. So, as a growth investor, you buy stocks that have a low price to earnings ratio.
Making money with stocks in the short or long term
Making money with stocks in the short or long term
Investors who invest over a short time horizon are called day traders. They try to take advantage of short-term trends in stock prices. Day traders typically hold their positions for only days, hours or even minutes. They aim for an annual return of at least 20%. The monthly target return is 2-3%.
Here we have a post for you that clarifies whether you can sell a stock in the short term.
Long-term investors, on the other hand, usually hold their positions for years or even decades. As already mentioned, the average return of stocks (per year) is about 7 to 10%; over a period of 10 to 15 years. So if you open a position with an amount of 1000 Euro, the return after the first year is about 70 to 100 Euro.
This does not mean that only this group of investors invests professionally, because there are professionals in both categories. However, the more often one trades and changes positions, the more transaction costs and capital gains taxes are incurred.
Risk versus return
Risk and return are highly correlated when investing. This is because increased potential returns are – usually – accompanied by increased risk when investing. Conversely, lower returns are usually associated with lower risk. Types of risk include industry-specific, competitive, international, and market.
The overall risk of a portfolio can be reduced through diversification. This, in turn, limits potential returns. Diversification means having companies from different industries and markets/sectors in your portfolio.
If you invest in only one market sector, you can achieve significantly higher returns if it outperforms the overall market. However, if the market as a whole falls, you may also incur equally high losses (lower returns). If you diversify your choice of stocks, you cannot eliminate the risk, but you can minimize it. Because your returns are not dependent on only one market or sector.
You may also want to know which stocks to buy as a beginner.
Conclusion
How much money you can make with stocks depends a lot on the investment strategy you choose. So do you focus on growth or value? And are you investing for the long or short term. Of course, there are other factors that can influence, for example, the development of the markets and thus your return.
Personal factors, such as the depth of your research for individual industries, markets and companies, also determine how much money you ultimately earn with stocks. We therefore recommend that you always use research platforms before investing, but also to read company reports and annual financial statements.
If you are still not sure whether you should start investing at all, then also read our article „Why buy stocks?„.