Can You Get Rich Just By Trading Stocks?

Low or no-fee online self-service brokerage firms make it possible for anyone to open an account and start trading with just a few clicks, and social media groups offer tips and tricks for successful trading. Often, success stories go viral, leaving many new investors wondering, “Can you get rich just by trading stocks?” 

The answer is yes, but there is a caveat. It is not common for investors to get rich quick. The stories of average investors realizing extraordinary returns – practically overnight – are rare exceptions. Getting rich by trading stocks takes discipline, patience, and most importantly, time. 

Invest for the Long-term

The true investing legends like billionaire Warren Buffett started with nothing and amassed tremendous fortunes. They accrued wealth over decades by choosing quality stocks and holding them long-term. 

This strategy creates wealth in two ways. First, quality stocks increase in value, giving investors the opportunity to “buy low and sell high.” Second, many pay dividends. When reinvested, dividends quickly increase portfolio value. 

Consider this: Warren Buffett began purchasing shares of Coca-Cola (KO) through his holding company, Berkshire Hathaway (BRK.B), in 1988. He still holds those shares today, and they have increased in value by approximately 1,550 percent.

In addition, Coca-Cola has a three percent dividend yield. That means in 2021, Buffett’s shares of Coca-Cola will pay out $672 million in dividend income. 

Buy the Fear, Sell the Greed

For most investors, trading stocks is more than a dispassionate financial transaction. It triggers strong feelings that result in buy and sell decisions based on emotion rather than logic. When individual stock prices drop, or the market as a whole is in decline, fear prompts investors to sell in an attempt to cut their losses. However, once the shares have been sold, those losses are locked in. Investors who sold won’t be a part of the recovery. 

The investors who get rich by trading stocks buy the fear – and get quality stocks at heavily discounted prices. Consider the 2020 market crash when Disney (DIS) stock went from nearly $140 per share to under $90 per share in a matter of days. Investors who bought the fear saw share prices soar to nearly $200 by March of 2021. 

Of course, there is another side to this story: investors who see share prices rise and can’t bring themselves to sell for fear of missing out. If the stock has gained 100 percent in a month, why won’t it gain another 100 percent next month – right? 

To put it bluntly, greed drives many investors to hold when they should sell and take their profits. Before long, the stock becomes overvalued, and the price corrects. Smart investors know that when everyone else is buying, and share prices are rising at an unsustainable rate, it could be a sign that it is time to sell the greed.  

Expect Drawdowns, Don’t Panic

A corollary to buying the fear is holding firm when quality assets decline in value. Often referred to as a “drawdown,” declines are to be expected. All assets experience ups and downs, but losses aren’t locked into until a sale occurs. If the drawdown is part of the stock, industry, or asset’s normal pattern, panic selling often turns out to be a mistake. 

Instead, examine the factors contributing to the decline in value. If there is a fundamental problem with the asset – for example, stock in a company that is unlikely to recover after a financial disaster, then prospects for recovery are bleak. Selling could be a smart move. However, if the drawdown is comparable to historical activity and the contributing factors are temporary, the smartest financial move is to hold and wait for recovery. 

Diversify Your Investments

The concept of diversification can be summed up in the old adage, “don’t put all of your eggs in one basket.” Individual companies, industries, and asset classes can be devastated by supply chain issues, natural disasters, geopolitical events, and economic catastrophes. When an entire portfolio depends on a single stock, industry, or asset class, the losses can be nearly insurmountable. 

For example, the COVID-19 pandemic flattened demand for travel. In a matter of weeks, the airline, hospitality, cruise ship, and theme park industries were in trouble – not to mention companies that depended on them, like rental car agencies, travel agencies, entertainment, event planning services, and similar. 

A number of large companies were forced into bankruptcy, including Hertz and Virgin Atlantic. Others saw share prices plummet. Investors who were overly optimistic about the travel industry’s growth in early 2020 saw the value of their portfolios nosedive. 

Diversification protects the total value of an investment portfolio because declines in one stock, industry, or asset class are offset by inclines in another. For example, when economic times are tough, consumer staples like food and household goods continue to thrive while consumer discretionary like electronics suffer. When the stock market goes down, assets like gold and government bonds generally remain stable or go up, limiting total losses. 

Buy Growth Stocks For Added Oomph

Companies with a long history of weathering economic ups and downs are important for stability and reliable growth. Examples include blue-chip stocks like Johnson & Johnson (JNJ), Warren Buffett’s Berkshire Hathaway (BRK.A), and Visa (V). However, the addition of growth stocks can be helpful in putting a little pep into total returns. 

Growth stocks are those companies that are focusing on expansion – often, they are reinvesting in the business rather than paying dividends. They are generally expected to increase revenue and earnings more quickly than their industry peers, which typically leads to rising share prices. Examples of such companies include Shopify (SHOP), Square (SQ), Netflix (NFLX), Amazon (AMZN), and Alphabet (GOOG). 

Dollar Cost Average

There’s some excitement in trying to pick the next Apple (AAPL) or Microsoft (MSFT). After all, who wouldn’t want to get rich just by trading stocks? The folks that bought Apple during its IPO and held onto their shares have seen 373,200 percent growth, and shareholders who bought into Microsoft when it went public have realized growth of 3,101,000 percent. 

The trouble is that very few investors are successful in picking the next Apple or Microsoft early enough to benefit from those sorts of returns. Timing is crucial, and luck plays a role almost as important as experience and expertise in these situations. More often, investors put large amounts into promising IPOs, only to see share prices incline slightly – or not at all. 

Instead of betting on a handful of startups in hopes of striking it rich, smart investors design a diversified portfolio and rely on dollar cost averaging to reduce volatility. At its most basic, dollar cost averaging is the practice of investing consistent amounts at regular intervals – for example, $100 per week. 

Each time a purchase is made, the price is a little bit different, but the consistency ensures investors take advantage of dips and realize gains as they occur. Most online brokerage accounts provide a running dollar cost average for each asset, which illustrates total gains and losses based on the average price paid for the asset. 

Inflation Helps Asset Prices Long-term

Finally, if the goal is to get rich just by trading stocks, the impact of inflation can’t be ignored. One of the reasons standard savings accounts are a poor choice for building long-term wealth is that the low interest rates paid on such accounts can’t keep up with inflation. 

For example, if a savings account pays just one percent interest, but inflation is at five percent, the buying power of the cash in the account is diminished over time. With the right strategies in place, investing in stocks can yield returns that exceed the rate of inflation, protecting buying power.

It’s important to note that inflation isn’t all bad. In fact, inflation helps asset prices long-term. In the case of stocks, it is generally true that a company’s revenues and subsequent earnings will go up at a rate comparable to inflation, protecting stock value for shareholders. 

Better still, real assets like commodities and real estate tend to increase in value with inflation which is good news for those who have included such assets in their portfolios.  

Can You Get Rich Just By Trading Stocks? The Bottom Line

Investors can and do get rich just by trading stocks, but overnight success is more like winning the lottery than a mainstream event. Getting rich by trading stocks requires a thoughtful long-term strategy that includes a disciplined approach to buying and selling assets. 

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