How do I become rich in the stock market? I feel like there is money to be made, but I don’t know what to do. Jay J. ’21, finance major.

Welcome back to Money Matters 2020-21 school year edition. We are happy to be back for another year. I hope you will keep sending in your great questions. 

Jay, last year I wrote a few columns about how to open a brokerage account and how to invest in stocks. All of last year’s columns are on the The Hawk Newspaper’s website so I encourage you to read them.

I believe the best way to invest is by purchasing an index fund like the S&P 500. The S&P 500, or a similar index, is not sexy, but has historically returned 6-8% per year. A 6% return will lead to your money doubling in about 12 years. 

But let’s say you want to take more risks and invest directly in some individual stocks. You may be able to get higher returns by taking more risks. If you’re willing and able to take some losses, then buying individual stocks can work out quite well.

Some people feel they have to take extreme risks to make real money, but this is not true. I strongly advise staying away from options and the triple return and leveraged funds that supersize daily stock market returns. Those “investments” are for professional investors and have extreme risks. They are not appropriate for the average, or even above average, investors.

Let’s look at Amazon as an example of how one can become wealthy by choosing a good company and holding it for a number of years. I am sure we all know Amazon as the premier online retailer. Amazon also has a number of other businesses, like cloud services and the recent purchase of Whole Foods. Amazon stock was recently trading at $3,400 per share. Five years ago, in 2015, the stock was trading at $650 per share and 10 years ago, it was at $150 per share. A person who bought 10 shares of Amazon for $1,500 10 years ago would have stock worth $34,000 today if they held it and did not sell. This is a return of almost 37% per year!

Is there an Amazon out there now? I believe the answer is yes, and likely more than one. The trick is finding it. Warren Buffett, one of the great investors of his generation and one of the richest people in the world, said to invest in what you know, buy great companies and hold on to them. That is greatest advice on how to get rich through the stock market.

Anna Lubomirski ’21:

Before investing, it’s important to decide how much risk you’re willing to take. I found that index funds, single investments composed of a number of stocks, are slow in terms of returns but are less risky. They also involve less maintenance, which I think makes keeping track of them easier if you’re new to investing. However, someone willing to have higher involvement and risk in their investments in hopes of quicker returns might opt to purchase stocks individually. Overall, more than one way exists to make money from the stock market, but you really need to find the way that fits best with you.