4 Steps to Making Money in the Stock Market

Are you interested in getting started in the stock market but have no idea where to start? In this article you'll learn how to get started from zero to making money in the stock market.

I met my first successful stock investor when I was relatively young. My friends and I were invited to a party through friends of friends. I can still remember arriving at the house. We pulled off the main road onto a little driveway that lead back into the woods. We followed the road in the darkness and after a short ride we saw lights through the woods and arrived at the house. It was a big beautiful log cabin back in the woods.

We could hear voices in the distance. We walked up to the front door and knocked. An older guy in his forties answered. He welcomed us and invited us in. As we followed him I looked around at the interior of the cabin with intricate wood beams and tall rock fireplaces. It was a beautiful home nestled in the woods.

He lead us to rear patio door and lead us out to a huge sprawling deck with with lots of people mingling and talking to each other. The deck overlooked a small river the flowed by surrounded by nothing but woods. It was an amazing picture!

I asked a friend what does this guy do to get such a beautiful piece of property. He replied, "He's a stock investor." I was amazed.

From that day forward I was 100% committed to investing in stock market and learning everything I could about it. I had learned a bit about stocks earlier but that moment really locked in the fact that they we're going to play a large role in my life going forward.

I remembered years earlier my grandfather telling me that if I invested $10,000 dollars in the stock market during my early 20's it could be worth over $1,000,000 by the time I was ready to retire. Between that information and what I just saw I was ready to learn.

Now, I did not become a millionaire over night or even in a couple years. In fact, I still haven't hit $1,000,000 yet, but I'm well on track to hit it in the future.

By the time I was 30 I had accumulated over $100,000 dollars in stock investments and the amazing thing about investing is that it grows faster and faster as you build up more money in stocks.

I'm going to show you how I invest and have had steady gains for years and commonly beat the S&P 500 returns. I don't make $100,000 a day like some day traders may make with huge stock piles of cash. However, it is not uncommon for me to make around $3,000 on a good day through simple and relatively low risk investing.

If you want to make a quick $100,000 or something like that go elsewhere, but if you want to invest to make fairly steady returns that will make you a millionaire in time read on. I'll tell you how to do just that.

Making Money in the Stock Market Checklist

 

Step 1 - Get a Stock Investing Account

The absolute easiest way for a new investor to get started is Robinhood. You can get it at www.robinhood.com. It's a completely free app that makes it very easy to invest in the stock market.

I've been using traditional brokers like Scottrade and Ameritrade for years and the interface was a pain to use and the fees we're ridiculous. Between the two brokers I spent $7 to $10 for every single trade! That adds up over time.

Robinhood runs on your phone and is 100% free. I buy stocks often and pay nothing every time. It's amazing!

On top of that they added the ability to use your deposited cash and cash from stock sales immediately! With other brokers I would initiate a deposit or sell a stock and have to wait around 3 days just to get the cash available again to buy another stock. What a waste of time..

You really can't go wrong with Robinhood. Download it and create your account. Once it is setup you'll be swiping and purchasing stocks in seconds.

Step 2 - Setup Automated Deposits

To buy stock you'll need to deposit cash into Robinhood. Luckily they make it super easy to do.

Connect you bank account by entering your account number and your banks routing number. Goto the profile menu in Robinhood and under the Banking settings and you can create as many reoccurring Automatic Deposits as you'd like by pressing Add Automatic Deposit. You can setup one time, weekly, twice a month, monthly, and quarterly deposits.

What you put in is up to you. If you're currently not saving or struggling to save any amount will make a difference. Ideally you'll want to be investing 15% - 20% of your income into different types of investments overall, but initially that number may be daunting.

Just starting out with stock picking I would begin with 5% of your income. That is a good starting point and can be adjusted in the future.

Just to get started you can do a one time deposit to get some cash in your account to start testing the waters. Once your first deposit has gone into Robinhood you're next step will be to pick which stocks you want to invest in.

Step 3 - Picking Your Investments

This is a vast topic that could be discussed in whole classes but I'm going to break down the key things I look for when investing that has given me solid returns consistently. Here are 5 key things to look at when picking winning stocks.

#1 - Stick to Companies You Know

A common recommendation is to diversify, which is good advice. However, not knowing anything about the companies you diversify into eliminates the benefit.

When I first started out investing I tried to use a common diversification strategy of buying stocks in different types of businesses such as oil, manufacturing, banking, tech, etc.. 

It didn't work out well.

I didn't know much about the companies I was investing in and thus I got mediocre results.

I've worked in IT and IT Security for over 14 years. I live in and breath technology. So you know what I did? I invested in companies I knew very well.

I invested in companies that I knew we're growing and gaining popularity among the IT community. I invested in tech companies I knew had great products and we're growing in popularity.

My results skyrocketed! Instead of owning companies I had no idea what was happening with, investing in companies I knew A LOT about made a huge difference.

List out 5 companies that you KNOW have great products from you're hands on experience and knowledge of that area. Look to your professional experience and life experiences. These are companies you would love to own for the long term because you know they have staying power and are well regarded by the community in which they sell.

#2 - Look for Growth

You know what makes a stock value go up?

It's simply goes up when there are more people buying the stock than selling. That's all there is to it.

But the question is what makes people buy the stock.

Generally it is good news about the company, and the main news that drives prices up is solid earnings growth.

Basically earnings are:

Income - Expenses = Earnings

It's also known as net income.

A solid company will have great earnings growth. So take a look at any financial site like finance.google.com and pull up the one of the companies you were looking at and check the past 3 years of earnings.

Have they gone up, down, or stagnated? If they are going up you may have a good stock, continue on the checklist. If earnings are going down or stagnating I would avoid them.

#3 - Find Companies with a Unique Product or Niche Domination

Think about a type or niche of business. Who is dominating. Who is so unique they don't have much competition.

Here is an easy example, who dominates the coffee market? Starbucks of course. They have create a unique experience and dominate that market.

Who creates an amazing electric automobile that no one has been able to match? Tesla.

These are examples of companies who have dominated their market or niche.

Now look at the 5 companies you though of earlier. Are they dominating the market or they merely a competitor in a sea of the same old companies?

If they are a market leader and don't have much competition in that area you may have a winner, continue on to the next criteria. If they just a same old, same old company then stay away.

#4 - Early Momentum

Momentum can be good or bad. It is a steady increase in the price of the stock over a period of time.

The bad side of momentum is when everyone is jumping on a stock because the price is going higher but there is no good data backing it up. At this point it becomes a fools game of who is the greater fool. Evenutally you run out of fools and there isn't anyone left to buy and drive the price up and the stock crashes.

Obviously, we don't want to jump on bad momentum, but want we want to find is good momentum.

Some stocks just stagnate even though they have solid fundamentals. When the public notices it's potential and starts buying it begins to rise. Now the price is moving upwards at a steady rate.

This is where you want to buy in.

If you've found a company with all the previous criteria and has suddenly been increasing in price over a 3 month period that is a good sign off the potential continued increase in price.

The final key to momentum is knowing when to jump off momentum train. The best strategy is to continue to monitor the previous criteria and the upcoming fine print in the next section. If any of the key criteria you used to choose the stocks changes for the worse. Thats a good indicator the momentum is coming to an end and it is time to sell the stock.

#5 - Checking the Fine Print

The final criteria is digging into the details and reading the fine print. This section is a little technical but it's great to know this information. It's kind of like the vitals or health of the companies stock.

So to check this information you are going to need to pull up your favorite stock site like finance.google.com.

  • Revenue - This is the total amount of money the company has earned during the time frame you selected. Revenue should be rising over the past 3 years.
  • Earnings - This is the money the company actually kept during the time frame you selected. As I explained in #2 you want to find a company in which the earnings have been growing over at least the past 3 years.
  • Debt - Just like personal debt it can be bad and you don't want the company you buy to have too much. You'll see below how to determine how much is too much in the debt to asset ratio.
  • Equity - This is calculated by taking assets - liabilities. Equity is always good. You'll see how to measure the companies use of equity in the Return on Equity ratio below.
  • Price to Earnings Ratio (P/E) - This is basically the current stock price divided by the earnings per share. This gives you an idea of how much you are paying for the stock versus what they are actually earning. This gives you a comparison number versus other stocks and how expensive they are. By itself I would not put too much stock in it, but when comparing stocks to other stocks and using all the other data I've given you in this guide you can get an idea how expensive the stock is. The average is 15 - 25. So, if a companies P/E is below that, it tells you that company may be undervalued and is inexpensive compared to other stocks. However, if it is above that it may be a bit overpriced and has too much momentum. I would use this as a guide incorporated with all your other data and not P/E alone.
  • Return on Equity (ROE) - ROE is how much a of a return the company is getting on the equity. This means how much money they are making with the money they have. In other words it shows how well the company is using it's equity. It is calculated by the formula Net Income / Equity. This is a great tool to compare stocks. Obviously the more return on equity the better. It's also great to see this ratio growing over time as well.
  • Debt to Asset Ratio - This ratio tells you how much debt they have in comparison to their assets (cash + property). Ideally the less debt the better. This is another great comparison tool to compare companies. .6 debt ratio is considered high and 0 means they have no debt. I try to stick with companies with as little debt as possible.

There are more advanced ratios and chart analysis techniques, but you don't have to use them to get good results. These basic techniques have allowed me to beat the market and make significant gains for years. If you get started and love it, all those advanced techniques will be waiting once you've got the fundamentals down.

If you haven't already, pick some stocks. Preferably invest in at least 5 companies so you have some diversification in companies in case one or two are not performing as well as you liked. Once you've bought your stocks celebrate! Congratulations you are now officially a stock investor! Now let's learn how to monitor those investments.

 

Step 4 - Monitoring Your Investments

One thing you have to realize with stocks is that they go and up and down every day. You can't look a stock chart every day and determine to sell based on a dip in stock price. There are days when the entire stock market is down and sometimes for even months during a down turn. You have to look at the long term with stocks. I recommend only looking at your stocks on a weekly basis if ups and downs make you nervous.

Emotions are your worst enemy in investing. If you stare at the charts day in and day out and the stock is not doing well you may panic. You're gut will tell you sell, sell, sell! Don't listen to your emotions!

Stick to your numbers. Watch the criteria that made you invest in the first place. This is a long game. Buy stocks you believe in and have good ratios. As long as the number still add up, most likely the stock will bounce back and continue to perform well. 

If the ratios are declining the company no longer fits your initial criteria for selecting it. Sell it. No emotions. Just numbers. That how stock investing works.

Don't procrastinate. Get out there, open your account if you haven't already and start investing!


David Shepherd is the creator of Let's Automate Your Life. Learn how to automate your money and free yourself to do what you love!

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