How do I Create Wealth Through Stock Investing?

by Kay Dean, Demand Media

    Anyone can make a small fortune in the stock market. All you have to do is start with a large fortune. Perhaps that is a little drastic, but the reality is the vast majority of professional managers at fund companies fail to do better than major stock indexes such as the Standard and Poor's 500, or the Wilshire 5000. It is certainly possible to create wealth by investing in stocks, but it requires diligence, vigilance, timing, perseverance and a certain amount of luck.

    Step 1

    Determine where you are financially. Find your net worth by adding up all of your assets and subtracting all of your debt obligations. Develop a budget by listing all of your monthly income and all of your monthly expenses. These two steps will tell you how much money you have available for investing.

    Step 2

    Determine where you want to end up financially. Ask yourself some specific questions and write down the specific answers. At what age do you want to retire? How much money will you need to retire comfortably? How much time do you have between now and then? How much money do you have to work with? How much risk are you comfortable taking? Once you know the answers to these questions you will have a good idea of how much you need to invest on a regular basis to reach your goals.

    Step 3

    Do your research, then open a brokerage account and start investing. There are two primary routes you can take when it comes to investing in the stock market. You can use a full service broker who will make investment recommendations based on your needs and desires, or you can use a discount or online broker that will execute your orders but will provide little or no advice. Discount brokers are less expensive, but provide fewer services. A third options is to invest in mutual funds, which provide both diversification and professional management, but even this option requires research. Remember, most mutual funds don't beat the averages.

    Step 4

    Invest regularly. Investing a set amount on a regular basis provides a benefit known as dollar cost averaging. This means during periods when the market is high you will purchase fewer shares. When the market is low you will purchase a greater number of shares. By investing a set amount of money each month, rather than purchasing a specific number of shares of stock each month, the average cost per share will be lower.

    Step 5

    Cut your losses. You typically buy a stock because you believe it is going to increase in price. The problem is, you are probably buying it from someone who is equally convinced the stock's price is going down. The reality of investing is, the market will fluctuate. Some stocks go up, some go down, some go up and down. Some investors make money while others lose money. In order to create wealth in the stock market you cannot become emotionally attached to a particular stock. Always set a stop-loss price at the amount you are will to lose, and get rid of the stock if it falls below that level. If the price of the stock goes up, raise your stop-loss point to protect your profits.

    Tip

    • A proper financial plan will include savings, insurance, living expenses, debt reduction and retirement before risking money in the stock market.

    Warning

    • All investments in the stock market involve risk. Some stocks are riskier than others. Past performance is never a guarantee of future results. Investors may lose some or all of their investment.

    About the Author

    After attending Hardin Simmons University, Kay Dean finished her formal education with the Institute of Children's Literature. Since 1995, Dean has written for such publications as "PB&J," Disney’s "Family Fun," "ParentLife," "Living With Teenagers" and Thomas Nelson’s NY Times bestselling "Resolve." An avid gardener for 25 years, her experience includes organic food gardening, ornamental plants, shrubs and trees, with a special love for roses.