Want to make a million dollars in the stock market? In this post we look at how you can get started, how long it will take, where you can invest, and how to speed things up!
When you think of the stock market, you probably see a bunch of stressed out day traders biting their finger nails, watching 10 different computer screens, while obsessing over the Dow Jones and the s&p 500.
Although the day trading strategy works, it's very difficult to earn large sums of money without large investments. It will also be very challenging for beginners, so unless you're ready to loose a lot of money, you'll need to spend a lot of time learning exactly how to beat the stock market.
So what's the alternative? Long term investing!
Long term investing involves putting money into investment funds over a period of many years, and forgetting about it. This way, any day-to-day ups and downs that would have day traders on the verge of a nervous breakdown are totally irrelevant.
What is long term investing?
The goal of most long term investors is to reach millionaire status by the time they retire. To do this you need to invest your money into an investment account that gives you the best possible returns.
Why not just save it in a bank account?
Bank accounts simply don't pay enough interest to reach millionaire status by the time you retire. The best interest rates you can expect are about 2.5%, and there are no other benefits whatsoever.
What this Means
If you start with $5,000 and then save or invest an additional $5000 per year, while earning 2.5% interest on your money, it will take you almost 71 years to reach 1 million dollars.
If you're already 30 years old this simply isn't good enough, so you'll need something a little better than an high interest bank account.
Why invest in the stock market
Buying into the stock market is a great alternative to investing money in a high interest bank account. You'll have better returns, and there's a much higher chance of becoming a millionaire.
How does it work?
When you buy a share in a company, you're basically buying a very small piece of the company.
Companies are built for growth, and as the company that you bought into grows, it also increases its profits year by year.
Stocks can make money in two ways:
- If the price of your share goes up.
- When the company pays dividends to its shareholders.
Share price goes up: stock prices change everyday due to supply and demand, this is how day traders make money. They buy when the price is low, and sell when it's high.
Over weeks and months, stock prices also rise and fall. But in the long run (5+ years) they are generally expected to increase, due to increases in company profits.
As a companies earnings go up, so do the prices of its stock. This means that your shares will be more valuable than when your bought them.
Company pays dividends: when the company you bought into makes a profit, it will use it's earnings to further expand the business, and to pay a proportion of the profit in the form of dividends to its shareholders.
Most companies pay quarterly dividends, and the amount you are paid will vary from company to company. You will be paid a certain amount per share, so the more shares you own, the more dividends you will be paid.
8 steps to make a million dollars in the stock market
- Find an online stock broker
- Open an account
- Choose your investment fund
- Add money every month, or at every opportunity
- Plan to invest for the long term
- Reinvest your dividends
- Stay the course
- Collect your million dollars at retirement!
Can you make a million dollars in the stock market?
Long term investing in the stock market is one of the simplest ways of making a million dollars while continuing to work your regular day job. It's one of the most common ways for people to become millionaires, but although it's simple, it will require a lot of discipline.
So how much do I need to invest?
The table below shows how much money you will need to invest into your stocks and shares account to reach 1 million dollars by the age of 65. As you can see, the earlier you start investing, the easier it will be.
|AGE||$ per day at 3% interest||$ per day at 5% interest||$ per day at 7% interest|
|20 years old||$29||$16||$4|
|25 years old||$35||$21||$12|
|30 years old||$44||$29||$18|
|35 years old||$56||$39||$27|
|40 years old||$74||$55||$40|
|45 years old||$100||$80||$63|
|50 years old||$145||$123||$103|
|55 years old||$235||$211||$188|
The average annual return since adopting 500 stocks into the S&P 500 in 1957 is roughly 8% (7.96%). We'll talk more on the S&P 500 shortly, but assuming this rate at the age of 20, all you'd need to invest is less than $4 a day to reach 1 million dollars by retirement!
I suggested lots of ways you can save money to get rich in THIS POST, so get to work now so you start investing asap.
So what's the best way to go about this?
One of the best ways to invest your money is with a low cost index fund or ETF.
So what exactly is an index fund?
An index fund is basically a group of companies that you can invest your money into.
When you invest by buying a share, you normally buy a small portion of a company. But when you buy a share in an index fund, you buy a small piece of multiple companies.
There are various platforms that you can use to invest, and the one I'm currently using is Vanguard.
Brokers like Vanguard have to charge certain fees on your account to cover the work they're doing for you. I recommend Vanguard as they offer some of the lowest fees you'll find, as well as a super reliable service.
Why choose to invest in an index fund?
Investing into an index fund has multiple benefits:
- Very low fees, the lowest you'll find
- Very easy with very little work involved
- There's no skill required, buy it and forget it
- They have some of the best returns available
- Outperformed 99% of individual stock traders
- Lots of diversification, for example S&P 500 has 500 stocks
- Outperformed 95% of hedge funds
What is a good fund to invest in?
There are various index funds and ETF's available through Vanguard, but a great place to start is with an S&P 500 ETF. I'm currently invested in this fund, and top investors like Warren Buffet also suggest you put 90% of your money into the S&P 500.
The Vanguard S&P 500 UCITS ETF currently holds 507 stocks in the largest US companies. The portfolio includes huge companies like Microsoft, Apple, Facebook, Coca-Cola, Amazon, and McDonald's.
This means that when you buy a share in the fund, you're becoming a shareholder in all of these companies, rather then doing it separately, or one-by-one.
Being invested into such a large number of companies also means that if one company under-performs, it won't have such a big impact on your investment, as if it would if you had only bought shares in that one company.
How to make more money from your investment
It's important to keep adding money into your investment whenever you can. If you just add $500 and forget it, you'll never make a million dollars by the time retirement rolls around.
So set up a monthly payment to top up your investment with as much as you can afford. The more shares you have the quicker your money will grow, and the more dividends you'll collect!
When you first start buying stocks, and you only have a few hundred dollars invested, dividend payments will be small, but nonetheless, they still provide extra money in your pocket.
As your investment grows and you keep buying more shares, your dividend payments will also increase, even if the share prices drop.
Instead of spending the dividends you receive, it's important to reinvest them.
Don't see dividends as a gift from the company that you can blow on pointless junk each quarter. Instead, see them as part of your investment that's needed to buy more shares, and as a ticket to a faster million dollars.
70% of investor returns in the history of the stock market have come from dividends!
Generate more money
Another way to speed up your returns and make more money is by generating more money that can be added to your investment. Do this by starting your own business, micro-business, or passive income stream.
It doesn't matter how small the amount of money you're making from your own business, it can all be invested into the stock market to increase your investment.
Check out some ways of making more money, either online or from a regular job HERE.
Can you loose money in the stock market?
No one can predict what will happen in the future, so there is always a risk when you invest in the stock market. This is why it's recommended that you invest for as long as possible, so you can ride out any dips that may occur.
It's also recommended that you don't put all of your eggs in one basket. This means buying into more funds than just the S&P 500 for example. This should be a collection of different shares and bonds to diversify your portfolio.
Some common ways for people to loose money from changes that occur in the stock market are:
- Buying when prices are high, and selling when they're low. This is a guaranteed way to loose money, so if you're only in it for a few years, be sure to wait until the prices drop before you buy. Or if you're already invested – consider buying more stocks while prices are low.
- Panic selling. If the prices of shares drop, you need to keep calm and ride it out. They always recover, it's just a matter of being patient.
- Watching the market closely. Don't obsess over the market, make your investment and forget it. Warren Buffet says - “Don’t watch the market closely.” If investors are too worried about their stocks dropping “a little bit, and think they should maybe sell them when they go up, they’re not going to have very good results.”
How else can you loose money?
One more thing that I advise against is hiring somebody to invest your money for you. Most of these people will put your money into high cost funds that pay them a commission. This way they make money from your investment, and you loose money on fees and the commission that you pay to them.
Paying higher fees
One reason that I recommend Vanguard is because their fees are so low. If you choose a different broker, be sure to check their charges and annual fees before buying.
So is it too risky?
There have been dozens of studies that show that time in the market beats timing the market. This basically means that nobody can predict what the market will do in the short term, so there's no point in trying.
The advice from top investors is to invest immediately and hold it for over 20 years. The stock market will grow, so stay in the market for the long term and you will do just fine.
Go and make a million dollars in the stock market!
You should now know the basics of investing your way to a million dollars, and if you follow these tips you'll be off to a great start. The two most important things you can take away are:
- Start as soon as possible, you aren't getting any younger! You'll also benefit from being able to invest less per month.
- Stay in it for the long term, don't fail by selling after a few short years, or when the market tanks.
I've suggested the S&P 500 in this post as I think this is a great place for beginners to start, but don't feel that this is your only option, as there are other places you can invest.
3 fund portfolio
The S&P 500 lets you invest all of your money into the US stock index. I also suggest that you eventually invest money into bonds, and the international stock index.
This is known as the 3 fund portfolio, and gives you more diversification. The general rule is that the further you are from retirement, the more aggressive you can be with your investment.
So if you are in your 20's you'll be better off to go with more stocks, maybe 80% stocks and 20% bonds. Holding these for a long time will give you the best returns, and much more time time recover if we see a dip in the market.
If you're closer to retirement go with less risk by buying more bonds – 80% bonds 20% stocks. This way you have a much safer and stable return at retirement when you need the money.
Take a look at what Vanguard has to offer, and check out some of the other online brokers and trading platforms before committing to anything.
Have fun making a million dollars in the stock market!
If you don't like the sound of this, try investing in real estate instead, it's a great alternative that can offer over 7% returns!