Lets set the record straight – not everyone gets rich in the stock market, but there are quite a few that do. So, what’s the secret? Think of the stock market like this: For someone to win there has to be someone who loses, and this is what is called a “zero sum gain.”
The stock market makes room for both investors and traders. Investors are generally classified as medium to long term holders of securities. Traders will trade stocks anywhere from seconds up to months, it all depends on what type of trader they are. Both of these strategies have created riches for the people who knew what they were doing, and of course having a little luck doesn’t hurt either.
Investors: Most people are investors. They have a 401K at work, they invest in mutual funds with a broker outside, and they basically want to buy and hold these investments.
Getting Rich Using Compounding
The long term investor can get rich if they use compounding. The plan here is to save a certain percentage of your monthly income in an investment. The most common investment is a mutual fund. Many of these funds pay dividends of one sort or another. Instead of spending the dividends the investor reinvests the dividends along with their monthly contributions. Over a long period of time (30 years), the compounding effect can actually make the investor rich. Of course this all depends on the mutual fund they invest in and the climate of the stock market over that period of time.
Getting Rich Buying Stocks
People who buy individual stocks are generally more risk adverse. This means they can sleep at night even when their stock portfolio is in the dumpster. On the other hand, these same people can become wealthy overnight when their stock skyrockets on good news.
Stock Splits: Young companies offer opportunities for greater wealth. They generally start off with fewer shares of stock, and then as demand increases they will split the shares. If you owned 50 shares of that stock you now would own 100 shares. In a stock split the share price would also be cut in half, but if the demand continued the shares would increase in value again.
There have been many technology companies in the 80′s that split several times, and the people who invested in these companies and held the stock became rich many years later.