Want to make money by playing the stock market? How exactly do you make money with stocks? Before officially entering the stock market, many people have this question! But don't worry!

Today, Caven will guide you step-by-step on how to make money with stocks, the principles behind stock earnings, which stock trading methods suit you best, what you need to do as a beginner, and common questions for stock market newbies.

Additionally, there’s a guide on opening an account with the U.S. stockbroker Interactive Brokers (IB), providing you with more information to help you smoothly enter the stock market and start your investment journey!

How to Make Money with Stocks?

How do you make money with stocks? There are two main ways to earn money from stocks:

1. Earning from Stock Price Differences
2. Regularly Receiving Stock Dividends

Earning from Stock Price Differences

Most people are familiar with making money from stocks through "buying low and selling high" to earn a price difference. This means that when you buy shares of a company, as long as the company continues to grow, the stock price will also rise.

When the stock price exceeds the original purchase price, you can profit from the "buy-sell price difference" by selling the stock.

Regularly Receiving Stock Dividends

Another way to make money from stocks is by regularly receiving dividends issued by the company. Typically, when a company makes a profit, it will distribute part of the earnings to shareholders in the form of "cash," which may be issued monthly, quarterly, or annually. This is known as a "dividend."

Some companies also distribute "stock" or "gifts" to reward shareholders. Therefore, if you plan to make money by receiving stock dividends, you need to confirm beforehand how the company rewards its shareholders before investing!

Three Major Principles of Making Money with Stocks

After understanding the two main ways to make money with stocks, let's delve into the principles behind making money with stocks, which are also crucial for selecting a good stock!

Principle 1: Technical Analysis

Technical analysis is a method used to predict the movement of financial markets by analyzing past prices and trading volumes. Compared to other investment analysis methods, technical analysis is more akin to "market psychology."

There are various tools and indicators in technical analysis, such as candlestick charts, moving averages, and the Relative Strength Index (RSI).

These tools help investors gauge market "sentiment"—whether prices are likely to rise or fall. While technical analysis cannot predict the future perfectly, it relies on patterns to identify stock price movements similar to past trends, helping investors find entry and exit points.

Principle 2: Value Investing

Value investing involves analyzing various information about a company, such as financial reports and news, to judge its current value and future business strategies. This helps in assessing the intrinsic value of a company and assigning a fair value to its stock. By comparing the intrinsic value with the current stock price, value investors look for stocks whose value exceeds their price.

Value investors firmly believe that investor sentiment frequently changes, continuously affecting a company's stock price. However, a good company will eventually reflect its true value.

Therefore, value investors calculate a company's value. When the market is overly optimistic or pessimistic about an asset, causing the stock price to deviate from its true value, value investors buy when the price is below the value (buying cheap) and sell when the price exceeds the value (selling expensive), thus making a profit.

Principle 3: Index Investing

Index investing is an investment strategy that involves tracking the performance of a specific index of stocks or other assets. In simple terms, instead of buying a single stock, you buy a basket of stocks, which helps reduce risk. What are the benefits of this approach?

First, because you are investing in an entire "market," your investment will rise along with the overall market. Second, this method usually has lower costs since you don't need to spend time and effort researching individual stocks; you just need to buy an index fund that tracks the overall market or a specific sector.

Method: You can invest through purchasing index funds, ETFs, and other specific instruments.

Further Reading: What is a Weighted Index? Why Experts Value It Highly!
Further Reading: Top 2023 US Stock ETFs Recommendations: 5 Key Points to Invest

Which Stock Trading Strategy is Right for You?

After understanding the various ways to make money with stocks, you should identify which method suits you best. Here, we summarize two of the most common profit strategies and explain their respective advantages and disadvantages.

Short-term Investment Profits

This method focuses on earning through price differences. The short-term profit strategy aims to make returns in just a few days that could equal a year's worth of long-term investment returns. Investors need to spend long hours in front of the computer monitoring the stock market and invest considerable effort in researching the data of investment targets. This approach also tests the investor's stock-picking ability and their skill in timing market entry and exit. Consequently, the certainty of profit is relatively lower.

 

Long-term Investment Profits

This approach typically focuses on earning dividends and reinvesting them to generate a compounding effect. Known as long-term investing, it requires investors to be committed to the company's growth over time. Before investing, it's essential to assess the company's future potential, operational stability, and whether it has a unique edge over its competitors. These evaluations can be made by analyzing the company's financial statements.

Additionally, profits can be made by purchasing undervalued stocks and selling them once their prices increase. Another method is to invest in ETFs through regular fixed-amount or variable-amount contributions and collect dividends, allowing one's assets to grow steadily.

Short-term vs. Long-term investment profits

 

Should You Invest in U.S. Stocks or Taiwanese Stocks?

After understanding how to make money with stocks and the different profit strategies, Caven has also summarized the differences between investing in U.S. stocks and Taiwanese stocks. This will help you decide which brokerage account to open and what services and transaction costs to pay attention to when investing in U.S. or Taiwanese stocks.

Further reading: [Recommended U.S. Stock Analysis Websites] Top 10 Best Stock Websites, Including Illustrated Guides on How to Use Them.

How to Start Trading Stocks?

Before beginners start making money with stocks, Caven believes it is essential to understand the following five things:

1. Opening a Securities Account

Taiwan

In Taiwan, there are two ways to open a securities account:

• In-person: Bring two forms of ID, a personal seal, and NT$1,000 in cash (amount may vary by brokerage) to a brokerage office to open an account.
• Online: Choose to open an account online.

Additionally, you need a specific account for stock trading transactions, known as a settlement account, used for withdrawing and transferring money. Only after successfully opening both accounts can you start trading stocks and use your preferred profit strategies to make money.

United States

To invest in U.S. stocks, besides using domestic brokerage services, you can also use overseas brokerages. If you prioritize lower transaction costs, trading flexibility, or better buy/sell prices, Caven recommends using overseas brokerages for trading. While using overseas brokerages may incur a wire transfer fee, long-term investment costs are generally lower than domestic brokerage services.

For more information on opening accounts with overseas brokerages, check out the U.S. stock brokerage account opening guide articles.

Further reading: Recommended U.S. Stock Brokerages: Complete Guide from Start to Finish!
Further reading: Interactive Brokers (IB) Account Opening/Funding Guide with $1,000 Bonus & Taiwan-Hong Kong Exchange Zone!

2. Understanding Stock-related Fees

For Taiwan stock trading, whether buying or selling, brokerages charge a transaction fee. Typically, this fee is 0.1425% of the stock amount (0.1425 per thousand of the total price). Although this percentage seems low, it can be significant for large transactions. Additionally, when selling stocks, a securities transaction tax of 0.3% is also charged. Some brokerages offer discounts to reduce overall transaction costs.

For more essential information on stock investing, refer to the stock investment beginner's guide articles.

Further reading: Stock Investment for Beginners: A Comprehensive Guide | How to Buy Stocks - Expert Tips | Complete Five-Step Guide

3. Decide on Investment Tools

The stock market offers various investment tools beyond individual stocks, such as ETFs, fixed deposits, mutual funds, bonds, and foreign currency trading. After understanding the characteristics of each investment tool, choose the one that suits you best to effectively maximize its potential.

Here are examples of common investment tools:

• Individual Stocks: Refers to shares of a single company, such as TSMC or Hon Hai.
• ETFs: Also known as exchange-traded funds, ETFs allow you to buy a basket of assets (e.g., stocks, foreign currencies) at once. Managed by banks, these funds diversify risk and are less prone to extreme volatility, making them a great option for beginners.

Further reading: 5 Key Points for Investing in U.S. Stock ETFs and the Complete Guide to U.S. Stock ETFs

4. Decide on a Profit Model

For beginners, it is not recommended to start with short-term profit strategies. Instead, focus on stable profit methods, such as monthly fixed-amount investments in ETFs, to steadily grow your assets. As you gain more knowledge about the stock market, you can explore other profit models.

5. Make a Financial Plan

Many people have heard stories of losing their entire fortune due to a stock market downturn.

To avoid such situations, Caven suggests having a sound financial plan. For example, allocate 20% of your monthly income to investment costs, cover necessary expenses with the remaining income, and set aside some savings for emergencies. This way, you can protect yourself from losing everything due to investment failures.

Common Questions for Stock Market Beginners

Before beginners start making money with stocks, Caven believes it's essential to understand the following five things:

Q1. How do you make money with stock investments?

To make money with stocks, you can earn through price differences and dividends. If you are a stock market beginner, it's recommended to aim for stable dividend income first to avoid significant losses in your investment capital.

Q2. How much money should you invest in stocks each month?

For stable and noticeable results, consider investing at least NT$10,000 from your monthly income. However, if your income is not high, prioritize building an emergency fund first and start with a smaller amount for investments. This way, you can steadily earn money from stocks.

Q3. When can you buy or sell stocks?

If you are unsure when to buy or sell a stock, it indicates a lack of understanding of the stock itself. It’s advisable to thoroughly research the stock before trading to avoid potential losses.

Conclusion: How to Make Money with Stocks

So, which method should you use to buy stocks?

1. If you want to make money with stocks in a stable and low-risk manner, consider investing in ETFs to diversify your risk. This is also the most suitable investment tool for beginners just entering the stock market.
2. If you're looking to make quick profits from stocks, you will need to take on higher risks and dedicate significant effort to researching the stocks. However, it is recommended to have an emergency fund set aside to cover any unexpected needs.