How do investors make money?

How do investors make money?

Investors make money by investing in assets, such as stocks or real estate. The assets can appreciate in value, known as capital gains, or pay cash flow (e.g. dividends or rent payments). The more money invested, the more money an investor can make.

Imagine, becoming an investor and making your full-time income passively. Your money is making you money without any effort on your part.

Making money as an investor is one of the best ways to build wealth.

Luckily for you, I’m going to show you how investors make money. I’ll show you how much money you can make and how long it takes to start making money. The sooner you start investing, the sooner you’ll start making money!

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How do investors make money?

Investors make money by purchasing assets. Assets work to build the investor wealth through capital gains or dividend payments. Investors make more money by having larger sums of money invested. Money made by investment gains can be reinvested to take advantage of compound interest.

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Investors purchase assets

An asset is anything that can make an investor money. A rental property, business, stock purchase, and rental cars are all examples of assets.

Some investors borrow money, known as leverage, to build their wealth faster. An investor can invest the money they borrowed and earn more money than they owe on the loan.

For example, you can purchase a new car with a loan from the bank. Your monthly car and insurance payments might be $350. However, an investor could rent the car out on Turo and earn $700 per month.

In the example, the investor is making $350 per month and getting their car paid off. Eventually, the car would be paid off and the investor could keep making $700 per month or sell the car.

Assets increase in value or pay cash flow

Capital gains are when the value of an asset increases. You might buy a stock for $100, but then the price jumps to $120. In this case, your capital gains would be $20.

Dividend payments are cash payments you receive from owning an asset. Dividends can be paid from ownership of a company, owning a vending machine, or rent payments.

Investment gains are reinvested

Reinvesting your investment gains are critical for any investor looking to build wealth. The more money invested, the more money your investments make. Eventually, an investor’s investments can make more money than their living expenses, making them financially independent.

Compound interest is the concept that your investments make you money and those gains make you even more money. For example, you invest $100, which becomes $110 at a 10% return on investment. Next year, a 10% ROI means you earn $11 instead of $10 for a total value of $121.

Compound interest is small at low portfolio values. The real magic of compounding interest takes place at higher portfolio values.

For example:

A portfolio value of this much: Will result in this much investment return at 10% return on investment:
$1,000 $100
$10,000 $1,000
$100,000 $10,000
$1,000,000 $100,000

As you can see, investing gets easier with a higher portfolio value. Contributing $12k per year to your portfolio results in minimal gains when you’re just starting. However, at $100k you’re contributing $12k and your investments are almost matching your contributions.

Eventually, an investor can live off of their investment gains. For example, maybe you only need $50k per year in retirement. An investor who wants to withdraw 4% of their portfolio would need $1,250,000 invested.

How much can you make from stocks?

Most investors should invest in a simple S&P 500 index fund. The S&P 500 has annualized average returns around 10% since inception. Therefore, most investors should expect to earn an average return around 10%.

However, it’s important to consider your risk tolerance when it comes to investing. Investors who find the right stock can outperform the stock market. Alternatively, investors who invest in bonds would underperform the market.

Most people turn to the S&P 500 because it’s considered a relatively safe investment. You’re purchasing the top 500 companies in the United States, so you’re well diversified.

For example, let’s assume you purchased $10k worth of the S&P 500 and $10k worth of Shopify stock on 7/18/2016. Five years later, your S&P 500 would be worth $21,877.64 and your Shopify stock would have been worth $447,986.61!

Investing in individual companies is considered risky. You never know when a company might go bankrupt, losing your investment. However, you can get amazing returns when done right.

How long does it take to make money from stocks

Investing in stocks should be seen as a long-term investment. You can see stock market gains immediately upon your first purchase. However, the majority of buy and hold investors see positive returns on investment.

How many shares do you need to make money?

Technically, you only need one share or even a fractional share to start making money with stocks. However, the more money you have invested, the more money you stand to gain. Investing your first $100k is done primarily through savings, but investment returns start to pick up after $100k.

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Summary: How do investors make money from stocks?

As you can see, investors can make money from capital gains or dividend payments. Investors purchase assets which make them money and keep reinvesting their investment gains. The more money invested, the more money investors can make.

Investors should expect to earn around 10% annualized return on investment from stocks. However, other investing strategies exist like real estate, car rentals, businesses, and more. Stocks just happen to be one of the main ways an investor can make money.

Don’t expect to make a lot of money right away when investing. The majority of successful investors buy and hold for the long term.

You can make money in stocks with as little as $1 invested. However, true wealth building starts to happen after you’ve reached your first $100k invested. $100k invested allows you to start seeing noticeable investment returns that match most people’s contributions.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.