How can you make money, lots of it, from the stock market?

Firstly, let me start by saying, yes it is completely possible to make a lot of money from the stock market. 

So, at the end of this blogpost you will tell me the magic formula.

This is not clickbait to make you read the whole post, let me tell you right here, there is no magic formula for this. Now that that’s out of the way, let us get going. 

Let us talk about the stock market.

Are we going to discuss trading? 

For reasons unknown to me, whenever the stock market is mentioned, trading is what seems to come up. So, let us address the elephant in the room. 

Can you make money from trading? Of course you can. 

Can you make money consistently with trading? Of course not. There is no guarantee in life – except taxes and death (eye-roll). 

Do I know how to make money with trading? Hell no! 

But let me say this, trading is close to a zero-sum game. Kind of like poker. The odds will also be similar, you are sitting across the table and playing this game. Except, here you have no idea who else is at the table. The other players might be massive institutions or individuals. But the odds of getting this right are probably lower than poker. 

At this point, you might bring up Gamestop as an example of how small-time retail investors can take a hedge fund to the cleaners. But seriously, that has happened once in our lifetime so far. Not something to bet on! 

I guess you know which side of this fence I am on, by now. Trading is not a way to consistently make money in the long run, especially so if you are a retail investor. Even more so, if you are going to be doing other things in life than just trading, like for example working as a salaried employee. 

So, if the stock market is not ‘trading’, then what is it?

{successfully resisted the opportunity to roll out Warren Buffet quotes and stats, there is time for that later} 

The stock market as you know is made up of many companies. Some big, others not so big. You have the chance to buy a part of these companies and benefit from their growth over the long term. This is investing (as opposed to trading). 

Stock market investing is not ‘gambling’. 

It is about understanding which companies have a good opportunity to grow and buying a piece of that growth. 

How do you know which companies are going to grow? 

The short answer to that question, you probably don’t know. 

Oh! Then what the heck are we talking about here? 

Well, there are some companies which have proven over years that they know how to make money and grow. Ex. Unilever. If you had invested 100,000 rupees in Unilever stock in Jan 2011 then in Jan 2021 it would be worth ~780,000 rupees.  

Ah! So there is a guarantee of making money here. 

Erm…no, we don’t know that for sure. But there is a good chance that these companies will continue to grow. The growth might not be halcyonic but there will likely be growth. 

Let me also rain on that parade, there are many companies that made money at one point and then went south. Ex. General Electric 

GE hit a peak in Jan 2001 and has been on a slow downward trend since….

$100,000 invested in GE in Jan 2011 would be worth $60,000 in Jan 2021.

As an investor in the stock market, you will need to watch your investments. When you see signs of things going bad, be unemotional and exit the stock. As a retail investor, you will already be at the end of the line when it comes to getting such information. Don’t add to that with your own emotional attachment to a stock. 

So, I need to buy a stock and stay up at nights worrying about what will happen to the company and my money? 

Hmmm….yes, kind of. While it might not necessarily be every night. You will need to be aware of what is happening to the company, to the industry that the company is part of and finally to the economy as a whole. If you do not have the natural proclivity to read about these things and have an interest in them, then you should probably steer clear of individual stocks, even the blue chips (large companies). 

Huh! What then? Is the stock market not for me? 

Well, Mutual Funds were invented for people like us. Those who cannot actively track stocks but want to benefit from the growth they have to offer. 

Mutual fund companies have armies of analysts to research sectors and companies. They have professional managers who make the decisions about which companies to invest in etc. 

So, how much money can I make here?

Let us understand this just a little bit more, shall we? Mutual funds follow the same risk-reward pattern of the stock market. There are funds with lower risk and consequently lower returns. Remember the example above, large companies, which have demonstrated growth over many years. Similarly, there are funds with higher risks and a potential for higher returns. Of course, nothing is guaranteed. (yes we know, taxes and death…) 

Ex. 100,000 rupees invested in SBI Bluechip fund in Jan 2011 would be worth ~340,000 rupees today (May ’21).

So, now I need to stay up nights worrying about my mutual funds? 

Well….yes, kind of. But then it should be a lot less worrisome, you have invested in a fund managed by professionals. You have chosen a fund that invests in the kind of companies you are comfortable with. So, yeah, should be a lot less worry. 

Is that it ? 

There is one more thing you can do. 

You can simply buy a part of the market. Not stocks, not mutual funds. I am talking about investing in the index. 

You have probably heard the words Nifty, Sensex, S&P, Hangseng etc. You can buy a part of these indices. 

Say, what now? 

Let us take the Nifty – it is made up of the top 50 companies listed in the National Stock Exchange, India. So when you buy a piece of the index, you are effectively buying a piece of the top 50 companies in that exchange. The top 50 are reviewed every 6 months. So, your emotional baggage with a stock does not come in the way here. 

If you are a passive investor who would like to benefit from the growth of the stock market without losing too much sleep at night, then this is probably the best option for you. 

Finally! So, how much money are we talking here ? 

Well you know by now, no guarantee except……

But yes, let us look at what happened in the past, being fully aware that things might not be the same in the future.  

100,000 rupees invested in the Nifty 50 in Jan 2011 would be worth ~265,000 rupees today (May ’21). 

An annual return of 9.8% over 10+ years is nothing to scoff at. Especially if you also get to sleep more peacefully at night. 

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In summary:

• There is no surefire way to make money by trading in the market, especially when you don’t know who else is in the game. It is akin to poker. 
• If you want to invest in stocks, you will need to take the effort to read, understand and stay abreast of all relevant news. Not to mention you will also need to learn how to analyse companies. 
• To keep it simple invest in mutual funds, choose the right one based on your risk appetite.
• Finally to keep it even more simple, for a truly passive investor, invest in the index. 

What about the ‘lots of money’ in the title?

To answer the question in the title, you can make lots of money in the stock market by staying invested in it for a long period of time. That is one proven method. Of course, we all know that the only things guaranteed are taxes and death!! 

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Disclaimer: None of the opinions expressed here is to be treated as investment advice, please consult your financial advisor before making any investment decisions.