How to Make Money in Stocks: 6 Key Steps

Making money in stocks is usually a long-term game: Very few people clean up overnight. Instead, those who get wealthy by investing in stocks do so by consistently investing over a long period of time.

But while consistency and time are the key ingredients, there are other factors that can help lead to success — things like buying and holding, even during periods of market volatility, and reinvesting dividends to boost your returns. Here's how to sustainably grow your wealth with stocks.

1. Open an investment account

First thing's first: You need to have an investment account to buy stocks. Opening an investment account is similar to the process of opening a bank account, and you can fund your account through a bank transfer. Then you can use that money to buy stocks. An investment account is not an investment itself: It's where your investments will live.

There are several types of investment accounts, and choosing the right account for you may save you a lot of money on taxes. It may even benefit you to have multiple different investment accounts. For example, financial advisors often tell people to start investing with a 401(k), an investment account offered through employers, especially if the employer offers a match. Then, they often say to start investing in either a Roth or traditional IRA for tax benefits, then a traditional brokerage account if you have money left over.

2. Consider stock funds instead of individual stocks

If you want to make money in stocks, there is a much easier, and often more lucrative, way to do it: index funds. These investments are made up of dozens or even hundreds of stocks that mirror a market index, such as the S&P 500. With index funds — or a similar investment called exchange-traded funds — you don't need much knowledge about the individual companies to succeed.

Instead, you're investing in lots of stocks all at once, and you don't have to manage them individually. Investing through funds can help decrease your risk: If you are invested in three companies and one goes out of business, it will probably hit your portfolio pretty hard. If you're invested in 500 companies and one goes out of business, it probably won't affect you as much.

Yes, it's technically possible to earn higher returns with individual stocks than in an index fund, but you’ll need to put some sweat into researching companies to earn those returns, and the likelihood that you'll actually lose money is higher.

» Learn more: Stocks vs. funds

3. Stay invested with the "buy and hold" strategy

The key to making money in stocks (remember, if you're investing in funds, you're still investing in stocks) is remaining in the stock market. Your length of time in the market is the best predictor of your total performance. The buy and hold strategy is exactly what it sounds like — you buy stock investments that you believe will perform well over the long-term, then hold onto them for years to come.

The stock market’s average return is a cool 10% annually before inflation. But many investors fail to earn that 10% simply because they don't stay invested long enough. They often move in and out of the stock market at the worst possible times, missing out on annual returns.

The more time you're invested in the market, the more opportunity there is for your investments to go up. The best-performing stocks tend to increase their profits over time, and investors reward these greater earnings with a higher stock price. That higher price translates into a return for investors who own the stock.

4. Check out dividend-paying stocks

More time in the market also allows you to collect dividends, if the company pays them. Dividends are regular distributions of profits that some companies pay out to shareholders.

If you’re trading in and out of the market on a daily, weekly or monthly basis, you can kiss those dividends goodbye because you probably won’t own the stock at the critical points on the calendar to capture the payouts. There are also dividend ETFs you might consider for more diversification.

The real magic happens when you reinvest those dividends, which can boost your total return. That means electing to put dividend payouts back into buying more shares of the stock or ETF. This process can typically be automated through your brokerage account — we have a list of the best brokers for dividend stocks that do this well.

5. Explore new industries

If you're interested in investing in stocks for the rush, index funds or ETFs may not do it for you. So it's fine to set aside a smaller portion of your portfolio to dabble in individual companies or industries that get you excited.

Some industry stocks, like commodity stocks, are tried and true. Others, like AI stocks, are booming now — but that may change. You'll want to do your homework and research the industry and any potential investments first. One way to take less risk is to invest in industry ETFs, such as AI ETFs rather than AI stocks.

6. Dollar-cost average

The stock market is the only market where the goods go on sale and everyone gets a little nervous about buying. That may sound silly, but it’s exactly what happens when the market dips. Investors understandably become scared and often sell in a panic. But when prices rise, investors plunge in headlong. It’s a perfect recipe for “buying high and selling low" instead of "buying low and selling high."

To avoid that, you can employ a strategy called dollar-cost averaging. With this approach, you invest at regular intervals over time, which smooths out your purchase price so on average you're not putting a whole bunch of money into the market when the price is either very high or very low.