2 ways to make money from the stock market: I think only 1 makes sense

There are multiple ways to make money from the stock market. Here are two investing strategies popular today, but I think only one of them is viable.

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There are many ways to make money from the stock market. Some are simple, some complicated, and all carry an element of risk. Usually the riskier the investment, the higher the potential reward. The power to invest a small sum and turn it into a fortune is at the heart of every investor’s dream, but without following a sensible plan, it’s easy to get burned in the markets.

Jump on the ‘short squeeze’ bandwagon?

Nowadays it’s easy for anyone to start buying and selling shares from their mobile phones. Traditional brokers offer digital wallets and modern brokers offer fee-free trading. It’s even possible to buy fractional shares. This makes the barrier to entry very low. That’s a liability for the uninformed.

This week we’ve witnessed an uprising of the masses against the establishment. I think the story of US stock GameStop‘s share price rise has been endlessly entertaining. It involved a bunch of amateur investors squeezing out the hedge funds betting against the stock. And I think it will go down in the history books as a pivotal moment in investing. 

However, it’s also laid bare how volatile the markets are and how easy it is to get caught up in the fear of missing out (FOMO). This is a recipe for disaster, and for the ill-prepared can quickly spiral into major losses rather than impressive wins.

Make money from the stock market, slowly

A tried and tested way I prefer to invest money in the stock market is the buy-and-hold method of value investing. This is the one that Warren Buffett advocates and other billionaire investors like him. In simple terms, it means buying an undervalued stock and holding it in my portfolio for several years. This gives the company time to grow, improve or strengthen and its share price with it.

This past year has been challenging for many businesses globally as the pandemic has thrown multiple obstacles in their path. However, among the casualties will be survivors that not only scrape by but strengthen and expand. For investors who buy in when they’re struggling and support their comeback, the rewards can multiply to become significant gains. Success isn’t guaranteed of course, but that’s why research counts.

Gambling vs investing

This isn’t a new scenario created by the pandemic. Businesses will always face challenges, but this is a period when division in the markets is clear. Some companies are thriving, with their share prices rocketing to levels perhaps unsustainable levels. Others have been battered. Not all these companies will live to tell the tale, so that’s where the importance of research and due diligence come in. As investors, it’s vital that we understand the companies we’re buying shares in. If I don’t look at a company’s financial outlook, competitive advantage, and future potential, then I’m simply gambling.

There’s a fine line between gambling and some types of investing, but a buy-and-hold strategy when carried out with care isn’t gambling. It’s also proven to be a great way to build a substantial sum for the future. It’s my favourite way to invest, and the one I think makes the most sense for beginners too.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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