Editor’s note: This article was first published in September 2010. The Gamesa episode (a jump of more than 7% in one morning after two large contracts in China) and the income figures (a worker earning 1,000 euros a month who makes about 2,500 euros on the stock market; 200-300 euros of extra income) reflect that time and are anecdotal.
Can you make a living from the stock market? The answer is a resounding yes. In fact, many people do, and they aren’t necessarily the stereotypical millionaire: there are employees who earn more each year from their shares than from their own job.
Don’t think for a moment that living off the stock market is easy, or that having lots of money will make it easier. As we’ve said many times, investing in the stock market is a profession that requires some basic knowledge to get started and a broad knowledge to keep going.
That’s why there are millionaires who at some point in their lives lost their entire fortune on the stock market, although I should add that this is very unlikely to happen. Unlikely, but possible.
Before you think about investing in the stock market, you need to work out which investment strategy you want to follow: long, medium or short term. And you should never need the money you invest, because if the short term goes against you, in many cases you’ll end up turning it into a long-term investment to avoid taking a loss.
You’ll need patience and nerves of steel to watch the shares you’ve put your savings into fall at times and rise at others, with nobody knowing for sure when they’ll stop rising or stop falling. Watching your money lose value, then gain for a moment, only to drop again five minutes later, has given more than one investor a stomach ulcer.
Living off the stock market doesn’t mean handing your money over to someone else to manage as they see fit and invest wherever they please. Living off the stock market means managing your own investments and staying alert at all times to the right moment to buy or sell a share.
You need to follow the financial news, especially about the shares you plan to invest in, so that what happened to me with Gamesa doesn’t happen to you. I didn’t know it was negotiating two mega-contracts with China, and when its price started to take off, I wasn’t on the plane: I missed a return of more than 7% in a single morning.
It’s strongly advisable to keep your job or carry on with your business before dropping everything to invest in the stock market. Otherwise, the pressure of needing the money can lead you to make very bad decisions.
If you like finance and the world of the stock market appeals to you, believe me, it’s a very exciting world. But like bungee jumping and skydiving, it isn’t for people with a weak heart.
On the other hand, there are people who invest their savings in shares of one particular company and hold them for 20 years. These people don’t usually suffer losses, since share prices tend to rise over the years. Even so, some of them forget to keep an eye on news about that company, and a problem that gets worse to the point where the company goes bankrupt can cost you your entire capital.
There are even people with an investor’s mindset who use the stock market to earn some extra money. Their approach is part luck, with a touch of strategy. They buy a share after a steep fall without knowing the reasons behind it. As soon as the price recovers a little, they sell without waiting for further gains. This kind of lucky investor is after an extra income of around €200 or €300 a week or a month.
Then there’s the typical employee who earns a salary of €1,000 a month and makes about €2,500 a month on the stock market.
So yes, you can live off the stock market, but without knowledge, it can also be the death of you.
Further reading
- Common mistakes when investing in the stock market
- The most serious mistakes investors make
- The only secrets to getting rich; there are no others
- Free investing course
- Why the stock market is the most profitable investment
Featured image: cabezadeturco, CC BY-SA 2.0, via Flickr.
