How to Become Rich with the Stock Market

If you are a hedge fund manager or a portfolio manager, you quite possibly know how to become rich with the stock market. If you are an individual investor, even an experienced one, you may luck the skills or sometimes the luck to anticipate future market returns. However, designing an investment strategy is a matter of getting acquainted with the sources of investment performance rather than a matter of luck.

Investment performance is typically coming from five sources:

a) Treasury-Bill (T-Bill) yield: this is the short term risk-free rate of interest, typically 1-6 months.

b) Inflation-indexed government bond yield: this is the long-term inflation-risk-free rate of interest. These inflation-indexed bonds typically offer a premium return over T-Bills

c) Conventional Treasury bond yield: this is the long-term nominal risk-free rate of interest. This rate of interest is subject to the risk of unexpectedly high inflation. It typically includes a premium over inflation-linked bonds in return for the high inflation and a margin above this premium for the uncertainty caused by the inflation.

d) Market risk premium: this is the compensation that any investor seeks in return for owning an asset or future income at risk of loss. The market provides this reward for bearing market risk. Market risk is most obviously reflected in the equity risk premium and the credit risk premium. Equity risk premium is the amount by which equities are expected to outperform bonds or cash. Credit risk premium is the extra yield paid on corporate bonds to compensate for the risk that a firm might default. Less obviously, market risk premium appears in return for accepting various types of insurance risk and for different types of equity risk.

e) Investment manager skills: often enough, investment performance is attributed to investment managers' skills, which is widely regarded as am expensive, scarce commodity and can be mixed up with different aspects of investment performance that can normally be accessed easily and inexpensively. For instance, investment managers who are responsible for the asset allocation between stocks and bonds might overweight equities, because equities are expected to outperform bonds. For many investors, this is a reward for skill; however, it should be more be regarded a reward for risk-taking.

Another important factor when it comes to the stock market is the risk that you have to undertake. Stock trading is your most usual option to make fast earnings. However, the inherent risk that each stock bears can only be anticipated with careful planning in order to maximize profits.

As an investor you need to analyze each stock under consideration really carefully by checking out the industry in which the stock belongs, how the industry performs, what is the potential of the stock, how is the company expected to perform in the future and so on. This should be an ongoing process for every stock you choose. By comparing the stocks to the stock index and by looking at its historical data, you will gain valuable knowledge about the stock market.

You also need to be quite rational in your investment decision making, especially when the stock market is volatile. Emotionality has no place in trading because psychological biases can break your investment strategy and cost you a lot of money. Whenever new information becomes available in the market, you need to revise your investment decisions rationally and without panic in order to make sure they are still valid. Besides, a weekly portfolio evaluation would be helpful to that direction because it would reveal possible overexposure to risk.

Overall, becoming rich with the stock market requires patient and careful planning. You may choose to become a value investor, which may not be the quickest way to become rich, but it's a certain way to make money with the stock market. You may choose to invest in IPOs. If you had invested in Google before it went public, today you would be a millionaire. You never know which stock might be the next Google, Microsoft or Starbucks. You may even invest in small-cap stocks that are typically high risk, but also high return. Or choose a small-cap mutual fund to get the high return, while avoiding the high risk by allocating it in several assets. In any case, no matter what you do, make sure you have a plan and that you stick to that plan regardless of the altering market conditions.