It's possible to get rich by investing in the stock market, even if you're not already wealthy. You'll need a strategy, however, because even seemingly small investing mistakes could be costly.
Whether you're new to the stock market or have been investing for years, there are a few things to avoid if your goal is to make as much money as possible.
1. Investing too conservatively
One of the trickiest aspects of investing is balancing risk and reward. Throwing your life savings behind a new up-and-coming stock can be incredibly dangerous, but playing it too safe can be risky, as well.
If you're worried about the market crashing or nervous about investing, in general, you may be tempted to invest primarily in bonds or other conservative investments. While these investments are generally safer than stocks, they also have much lower rates of return, so your investments won't grow as quickly.
One easy way to see more significant growth while limiting your risk is to invest in S&P 500 index funds. The S&P 500 has earned an average rate of return of around 10% per year since its inception, compared to the 4% or 5% per year you may earn investing in bonds.
In addition, S&P 500 index funds are one of the safer types of investments. When you invest in one of these funds, you're instantly investing in 500 of the largest publicly traded companies in the U.S across a wide variety of industries. This limits your risk substantially, because even if a few of the stocks in the fund don't perform well, it won't sink your entire portfolio.
2. Not doing your research
Doing your research is key, especially if you're investing in individual stocks. While past performance doesn't predict future returns, studying a company's fundamentals and track record can help you determine whether a particular stock is likely to perform well.
Before you invest in any stock, look at factors like the company's revenue growth and profitability, its management team, and whether it has a competitive advantage in its industry. These factors separate the strong companies from the weak ones, and strong companies are more likely to see consistent growth over time.
The more research you can do on a company, the better. It's tempting to rely on news headlines or your gut instinct about a business's potential. While taking recent news about a particular company into account isn't a bad idea, it shouldn't be your only source of information when choosing stocks. By digging into a company's financials and history, you have a better chance of picking winning stocks that will succeed over the long term.
3. Trying to get rich quick
There's no such thing as getting rich quick in the stock market -- at least without running the risk of losing a lot of money.
Always remember that if a particular investment seems too good to be true, it probably is. All investments carry a certain amount of risk, but any investment with the potential to earn a lot of money in a short period of time is especially risky. While some people may be able to get rich with these types of investments, they're the exception, not the rule.
The best types of investments see slow-but-steady growth. You won't become a millionaire overnight, but you will see your money consistently grow over time. By choosing the right investments and holding them for the long term, you can make more money than if you were to put your savings behind risky short-term investments and potentially lose everything.
Even if you're not an expert investor, it's possible to make a lot of money in the stock market. By avoiding these three mistakes that may be holding you back, you'll be one step closer to building long-term wealth.