Can Stock Market make you Rich?

We have heard stories of many successful investors and traders who have generated abnormal wealth from the stock market. These stories inspire us to enter the world of stocks and make our own fortune. However, what we often discard is the fact that where one person earns such huge profits from there are thousands of others who lose their money on a regular basis.  

Here the real question arises that ‘Can stock market really make you rich’? Or it is a mechanism to benefit only a selected few. The answer to the question is simple, YES, the stock market can make you rich, but you need to proceed in it with utmost precaution and with proper knowledge otherwise it could also lead to instant erosion of your wealth. 

Therefore, instead of taking an extreme approach in the stock market by either being too greedy and losing your money or being negative towards the market and not entering it the best approach would be to ask the above question differently. We should ask, ‘Can stock market make you rich while minimizing the risks associated with it?’  

 

To answer it first let’s understand the styles of investing there are and under what category do you fall: 

1) Active: It is a type of investment style where you are actively involved in the process of picking up high-growth stocks or hire professionals who do it for you. 

2) Passive: Passive style of investing on the other hand is one method of investing where you take the backseat where you pick less risky stocks that provide stable returns over time. 

3) Trading: It is a riskier form of investing where you invest for a shorter duration of time ranging from some hours or even minutes to months. Trading has a high degree of risk as the market is very volatile during in the short term which makes it difficult to predict. Traders highly rely on technical analysis for predicting future movement of prices. 

4) Long Term Investing: This style of investment works on the buy and hold principle where investors focus on picking high growth stocks at the right price for a longer duration of time ranging from months to years. Long-term investors use fundamental analysis to select good stocks and aim to profit from capital appreciation and dividends. 

 

 

Ways to earn from stock market 

There are primarily two ways by which you can earn profits from the stock market which are: 

 

1) Capital Appreciation 

One of the most popular ways of earning profits is by way of capital appreciation, i.e. profits incurred from the appreciation of capital invested when the share price of the stock you invested in goes up due to various market factors.  

It is one of the primary profit sources for all types of investors- whether long- or short-term investors. While traders aim to profit from the higher or lower movement of prices of stocks, long term investors’ only objective is to pick the high value stocks at low prices and gain from the stock price appreciation over time. 

However, it is not a given that the prices of stocks will only go up and there are numerous occasions where the prices will go down as well, especially in bear markets which could also result in losses. Here the key is to pick the right companies at fair prices and give them considerable time to grow. 

 

2) Dividend Earnings 

People who buy shares of companies are called shareholders. They are valuable to any company, that’s why to incentivize the shareholders companies distribute a part of their earnings to them in the form of dividends. Companies distribute dividends among the shareholders per share. 

For example, if a company announces a dividend of Rs.10 per share and if the face value of the share is the same then it is called 100 percent dividend. It is another important source of earnings for long-term investors.  

Know how to generate passive income from dividend

 

 

Factors to consider before investing in stock market 

Here are some of the important factors you need to consider before entering the stock market to earn money and eventually get rich: 

 

• Equip yourself with right stock market knowledge 

Picking stocks wisely involves a general knowledge of economics, finance, and company law. Still, even if you have not had formal education, you can observe some general principles.  

First, learn everything about the company's business, reading its financial statements, including the income statement, balance sheet, and cash flow statement. Don't concentrate only on earnings; the balance sheet and cash flow statement offer equally important information. 

After you have reviewed the company's financial position, review its valuation. A solid balance sheet and a lower valuation than its peers or the market index overall indicates a possibly good investment.  

Stock information can be obtained from a variety of sources, beginning with the website of the stock exchange upon which the company is listed. These sites generally include financial statements and company press releases. Companies also place their financial information on their websites. 

 

• Diversification is the key 

Start by spreading your investments among various stocks, sectors, and market caps. Focusing your money on one sector or market cap is dangerous. Diversification by sector reduces the effect of negative economic conditions on a specific industry, as each sector's performance is determined by different factors such as economic climate, business cycles, and government policies. The purpose of diversification is to create a balanced portfolio in which overall returns are prioritized, not the performance of one or two specific stocks. 

 

• Avoid timing the market 

While looking at the history of a stock’s price movement we always feel that we could time the market based on the data available and book profits. However, what we neglect is that while doing this we always have the advantage of hindsight which can fool us into making us believe that we have cracked the market. 

In reality, nobody could exactly predict how the market will react in future. Although past data gives us an idea of the market solely relying on it and making decisions on that could be detrimental. It’s always better to diversify your investment across varied sectors and asset classes well and stay in the market for long enough to let compounding do it magic. 

 

• Know when to sell you investments 

The stock market is unpredictable and volatile therefore the buying and selling decisions in the stock market should not be based on short-term price movements but on the basis of your stock selections.  

If the fundamentals of the companies, you have picked remain strong despite volatile markets it better to stick with them and if you feel that with time due to market conditions the future prospects of your selected stocks have gone could you also make a timely exit from the markets by selling your investments. Also, even if your stocks are good, selling them at a higher valuation than what you have bought them for and booking the profits is an option too. 

 

 

Conclusion 

The stock market is a great platform to generate wealth over time while contributing to the country’s growth. However, it is important to note that it's not a money-making machine that will make you rich in no time. There are risks associated with stock market investment, and it is important to consider them and get proper knowledge before starting your investment journey.