Ways to Make Money In The Stock Market
The stock market is a place where people come to buy and sell shares of companies. Most people get into the market wanting to buy a stock for one price and sell it at a slightly higher price later on. If you know what you are doing that can be very profitable. However there are a lot of creative ways to make money in the stock market.
Here are 5 different ways that you can make money from the stock market.
1. Appreciation of The Stock
Of course the most well know way of making money from the stock market is through the appreciation of the stock. If you sell your stock for more then you bought it for you have made money. There are literally hundreds of different strategies and opinions out there on the best way to find stocks that are going to go up, so I’ll leave that topic for another time.
Another way to make money in the stock market is by investing into dividend paying stocks and collecting the dividends that they pay out. The two main advantages to investing into dividend stocks is that it allows you to get a nice consistent cash flow from the market without having to sell your stock and suffer the tax consequences. If you have enough money invested you can even live off of your dividends by themselves.
3. Buying and Selling Options
Stock options give you the ability to buy and sell stocks at a specific price on or before a specific date. You spend money to buy an option, and you can choose whether or not you want to exercise it before the option expires.
For instance if stock XYZ is trading at $45 and you think it is going up you can buy the $45 call option which cost about $4. That would give you the right to buy the stock at $45 in the near future. So, even if the stock goes up to $100 you could buy the stock at $45 and sell it at $100.
Options can be powerful, but they do expire after a while, so you’ve got to be careful. You cannot hang onto a stock option for 10 years because it might only be good for 2 months.
If you are trading stock options make sure that you know what you are doing first and that you have a short term perspective on the stock.
4. Selling Puts
A creative way of making money with stock options is by selling puts. Puts give the buyer the right to sell a stock at a given price by a given point in time. When you sell a put you are selling someone else the right to buy the stock from you at a given strike price on or before some point in the future.
In the situation above if we think stock XYZ is going up and is currently trading at $45 we can always take a safer bet and sell a $40 put on the stock making $3.
In this situation the stock doesn’t need to go up for us to make money. Rather the stock simply has to not go down below $40 before the time the option expires for us to make money. This is considered a high probability trade because the stock needs to come down a lot in a short period of time for us to lose money.
Of course there is one big problem to just selling puts and that is the fact that you can lose a lot of money if the stock does tank. Since you have to buy the stock at $40 if the option is exercised, you could potentially lose up to $40 per contract if the stock goes down to $0. (minus the $3 commission you made by selling the option)
There are 2 ways to get around this though. The first is by only selling puts on stocks that you do not mine owning. If you think $40 is a good price for the stock and you would be happy to hold onto it for the long term then it would be like getting paid $3 to get into a stock at a good price.
The other way would be to not only sell the $40 put for $3 but to also buy the $35 put for $2. In this case you limit your profit to $1 instead of $3, but you also limit your max loss from $40 to $5 since you can always buy the stock at $35 if the worst case scenario happens.
5. Selling Covered Calls
Selling Covered calls is an excellent way of making money from a stock that you already own. This is the process of selling a Call option to another trader once you already own the stock. This gives you the obligation to sell your stock if you are called out, but it also puts money in your pocket.
For instance let’s take the same stock as we used in the last 2 examples and this time we own it at $45 a share. We can decide to sell someone else the right to buy the stock at $50 from us in the future making us $3 from this trade.
Now if the stock stays below $50 until the option expires we will keep the stock and walk away with the $3 profit. If the stock goes above $50 we will be forced to sell it at $50, this would give us a profit of $5 on the stock and $3 from the option.
Selling covered calls can be a great way to make some extra income on your stock, but you have to be willing to sell your stock if you get called out.
Those were some of the creative ways of making money from the stock market. Successful traders find the way that suits them best and then stick to it until they succeed.