Actually making money in the stock market can be a contentious topic. True, billion-dollar trading firms make literally millions of dollars a day and generate huge cash flows, but this is a far cry from the plight of the individual investor. This article will go into some common sense ideas to show the average person how to make money in the stock market.
Stay out of stocks entirely. This may seem odd, but it is possible to make a decent return in the market by not buying stocks. How? By buying “junk” bonds. These bonds were a very big deal in the 1980s and parts of the early 1990s, but today are mostly ignored. A junk bond is simply a bond issued by a corporation or municipality that is rated below “investment” grade by the major ratings agencies. While it is not advisable to buy individual junk bonds, it is possible to buy a bond fund that invests strictly in junk bonds. One such fund is Vanguard’s “High Yield Corporate” fund. The advantages of a junk bond fund include a risk profile very similar to the stock market (most of the bonds held by junk bond funds are issued by companies that are publicly traded on the major stock markets) including the potential for appreciation of principal, but also a nicely steady income. You can expect to receive distributions of 7-12% a year on your purchase of such a bond fund, but be prepared for the principal to wildly fluctuate depending on the condition of the stock and credit markets.
Use quasi-insider investment strategies. This tip comes mostly from Peter Lynch’s seminal One Up on Wall Street (a book you should read if you are interested in the stock market at all). If you have a job, you have the inside track on information that is relevant to the price movement of any number of stocks. For example, if you work at a news media company, you have a much better view of the direction of the media market than the market at large. As such, you will be better able to predict the fortunes of publicly-held companies in news media. For example, if you know that ESPN is going to release a new website that will make its competitors effectively obsolete for the next few years, you may consider investing in its parent company, Disney. This is just one example; you already have access to all kinds of insider information with regard to the stock market based on your current job and/or hobbies.
Get a job in the stock market. This is the only truly guaranteed way to make money in the stock market. Financial service companies are always hiring and have surprisingly low barriers to entry. This is because education and experience are poor determinants of future success in finance. Accordingly, most financial firms are willing to hire at the entry level nearly anybody with a bachelor’s degree who can display intelligence and organization. The average entry level salary, especially after bonuses, in financial services is far above average.
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