How Much Money Can I Make From Stocks

To make money in the stock market, you have to start with big money, right?

Well, no. Contrary to conventional wisdom, you don't need to have a hefty trust fund or ultradeep pockets like mutual funds and other institutional players to start investing.

"If you're a typical working person or a beginning investor, you should know that it doesn't take a lot of money to start," IBD founder William O'Neil wrote in "How to Make Money in Stocks."

"You can begin with as little as $500 to $1,000 and add to it as you earn and save more money," he wrote.

And with many brokers now offering zero-commission trades, it's easy to make multiple buys and sells in a single stock.

O'Neil's First Investment

In fact, O'Neil started his investing career at the ripe old age of 21 years with just a five-share purchase of Procter & Gamble (PG).

What's more important than how much money you have to start investing is learning how to pick the best stocks. Stocks have the potential for big gains if you know which ones to pick at the right time. There are two components to the right time: the stock itself and the current trend of the overall stock market.

A stock could sport a top-notch grade from IBD, such as an excellent Composite Rating, a strong Earnings Per Share Rating and a solid Relative Strength score. Use Stock Checkup as a guide. The company may clearly be a leader in its field, but it's prudent to wait until the stock is breaking out from a sound base in rising volume.

Doing so boosts your chances of snaring a profit.

Start Investing With Just This Amount

To further raise the odds of a big run-up after a breakout, it's best to buy when the market is in a confirmed uptrend. Three of four stocks will eventually follow the market's direction, so it doesn't make sense to buy during a correction or when the market is under pressure. (Always read The Big Picture column so you can stay on the correct side of the market.)

Let's say you have $500 or $1,000 to start investing. In the past, you may have concentrated on just one or two potential winners, or up to four with $10,000. It made sense to minimize the number of trades due to hefty commission fees charged by brokers.

But now that the online brokerage giants offer commission-free trades, that's not an issue. Instead, ask yourself if you're comfortable having, say 10% of your portfolio in a single stock. What about 15% or 20%?

Now, what if you have a substantially bigger amount to invest, say $500,000 or $1 million? Similarly, rather than buying a few dozen stocks to hedge risk, it's still better to concentrate on no more than eight to 10 stocks. So in a $1 million portfolio, for instance, one stock could account for up to $125,000 in value.

"Even investors with portfolios of more than a million dollars need not own more than six or seven well-selected securities," O'Neil said. "If you're uncomfortable and nervous with only six or seven, then own ten. But owning 30 or 40 could be a problem."

The Right Size For Each Stock You Hold

Be sure to position-size appropriately when events such as earnings reports or an FDA decision is looming. Also keep in mind that Regulation Fair Disclosure (REG FD), enacted in 2000, has increased the risk of big gap-downs in a single day.

IBD Leaderboard not only offers sound investment candidates that meet key fundamental and technical growth metrics, but can help guide investors in terms of position sizing. For instance, a full position in a stock in the Leaders Near A Buy Point stock list aims for a 12.5% weighting in the portfolio for growth stocks; a half-position is worth 6.25% and a quarter-position is 3.125%.

The service also alerts users when Leaderboard stock position sizes are increased, reduced or they're removed from the list.

Concentrate Stock Positions For True Outperformance

Leaderboard stocks delivered a portfolio-weighted return of 58.4% in 2020, vs. a 16.3% gain for the S&P 500, excluding dividends.

The position sizing guidelines can help investors keep their portfolios under control, so a single stock doesn't get too big or is too small, for that matter. It also doesn't matter how little or how big the amount you have to invest. And the Leaderboard list comprises leading stocks handpicked by senior members of IBD's markets team.

As O'Neil notes in his book, "Keep things manageable. The more stocks you own, the harder it is to keep track of all of them."

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And the big money knows that better than anyone. Why? Institutional investors tend to use sound buy and sell rules for a concentrated portfolio of individual stocks, while also understanding the broader market trend.

It's never too early to start saving or learning to invest. The younger you are, the greater the chances to grow even a modest amount exponentially, as explained in this Investor's Corner column.

In A Small Portfolio, How To Concentrate

Don't try to reduce risk by buying 15 or 20 stocks. Concentrate instead on a handful of potential winners. With $10,000, stick with several carefully selected good stocks instead of a basket of names.

Suppose you have $10,000 and invested $5,000 of it in Facebook (FB) at its July 2013 breakout from a first-stage base. If you had bought shares near the correct buy point at 32.61 and held the position through mid-April in 2016, you would have gained 240%, or $12,000. Not a bad gain.

How about putting another $2,500 to work in Reynolds American (now a subsidiary of British American Tobacco) as it cleared a base — a saucer base with a 52.67 ideal buy point — in March 2014? With an 85% profit (excluding dividends), that wad grew to $4,625 just a little more than two years later.

A Big Overall Profit

If the remaining $2,500 went to the airline operatorHawaiian Holdings (HA) at its Oct. 22, 2014, breakout past a 16.18 buy point in a superb double-bottom base, shares would have soared 210% to $7,750 less than two years later.

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That initial $10,000 would have grown to $29,375. If you kept your losses in other stocks at no more than 7%-8% for each trade, you would be able to keep a lot of those profits. Always practice the golden rule of investing.

Remember, the big money is made by using sound buy and sell rules for a concentrated portfolio of individual stocks, while also understanding the broader market trend.

It's never too early to start saving or learning to invest. The younger you are, the greater the chances to grow even a modest amount exponentially, as explained in this Investor's Corner column.

A version of this column was first published on April 15, 2016. British American Tobacco acquired Reynolds American in July 2017. Please follow Gondo on Twitter at @IBD_NGondo for more analysis on top ETFs and growth stocks.

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