How to Make Money in the Stock Market: Proven Investment Strategies for Long-Term Growth and High Returns

 

How to Make Money in the Stock Market

Making money in the stock market is undoubtedly one of the most important questions when it comes to investing. Historically, the stock market has shown an upward trend, allowing investors to achieve significant long-term returns. In this article, we will analyze how we can benefit from stock market investing and what key factors we should consider to maximize our profits.

The Stock Market: A History of Growth

Historically, the stock market has been bullish. A clear example of this is the performance of the S&P 500 over the last 93 years. In 99.9% of cases, money has been made by investing in this index for a period of 20 years. The S&P 500 is the most representative stock market index in the world, consisting of the 500 largest companies in the United States. Since 1927, its annual return has exceeded 8%, even considering crisis events such as the 1929 crash. If we take the last 100 years, the annual return ranges between 8% and 10%.

This return has a logical explanation: the stock market has historically traded at a Price-to-Earnings Ratio (P/E) of 16. This means that if a company maintains constant profits, it would take 16 years to recover the investment. This generates an annual return of 6.25%. Additionally, company profits tend to grow due to economic growth and inflation, providing an extra 3% per year. Adding both factors, we obtain an average annual return of approximately 9%.

The Importance of Timing Your Investment

Although the stock market tends to rise in the long run, the timing of a purchase is crucial. For example, those who invested in 1929 or in the year 2000 took years to recover their investment, while those who bought in 2009 saw considerable profits within a few years.

Therefore, to make money in the stock market, it is essential to consider when and what to buy. Not all stocks have the same growth potential, and some opportunities arise after economic crises or sharp market declines.

Investing in Real Businesses

One of the most important things to remember is that when we buy a stock, we are acquiring a stake in a real business. We become full shareholders of a company, and if the company grows and prospers, our investment will too.

The stock market moves constantly. A stock can trade at different prices in a single day without the company itself changing at all. For example, on May 14, Aena's stock fluctuated between 144 and 147 euros, a 2% difference in just a few hours. This means that investors can take advantage of buying opportunities at lower prices without any fundamental changes in the company.

Benefits of Being a Shareholder

Being a shareholder in a company offers several benefits, including:

• Participation in Profits: Companies can use their profits to reinvest in growth or reduce debt. In both cases, the value of the company (and its shares) increases.

• Stock Buybacks: Some companies use part of their profits to buy back their own shares, reducing the number of shares in circulation and increasing the value of the remaining shares.

• Dividend Payments: Some companies distribute a portion of their profits to shareholders in the form of dividends, providing investors with an additional income stream.

How to Make Money in the Stock Market

There are two main ways to generate profits in the stock market:

1. Buying a Stock and Selling It at a Higher Price Later

This is achieved by purchasing undervalued stocks and waiting for them to return to their true value. For example, in March 2020, the pandemic caused abrupt declines in many stocks, even in companies unaffected by the crisis. NH Hotels, which recorded record profits in 2020, saw its stock price drop by more than 60%. Alphabet, which benefited from lockdowns, fell 33%. Today, both stocks have surpassed their pre-crisis levels.

Another way to generate profits is by investing in companies with growth potential. Facebook (Meta) and Alphabet have risen in the stock market because they have increased their profits year after year. Investing in companies with a reinvestment strategy, acquisitions, or expansion can yield high returns.

2. Earning Money Through Dividends

Dividends are another source of income for investors. Some companies distribute part of their profits among shareholders, providing an additional return without the need to sell shares.

Conclusion

Investing in the stock market is one of the most profitable ways to generate wealth in the long run. The key is to understand that we are investing in real businesses, analyze when and what to buy, and maintain a long-term perspective. Taking advantage of buying opportunities, reinvesting profits, and collecting dividends are effective strategies to maximize our gains in the stock market.