How do people get rich from stocks?
Do people actually earn through the stock market or is it all a big facade? Well you will find answers to these questions in depth in today’s newsletter.
First, let’s get the basics right. Stock Market is a platform where buyers and sellers meet. But to trade what exactly? Shares. And what are shares, they are units of ownership in a company. You get them in exchange for the capital or money you provide to the company.
Think of the stock market like a farmer’s market: You buy vegetables from a trader who bought them at cheaper prices from the farmer. And the difference between the cost and selling price is the trader’s profit. Similarly participants in the share market buy financial securities at a lower price and sell at a higher price. Essentially, this sounds very simple but is very tough to execute and hence earning in the stock market is no easy task.
What exactly makes it so tough?
Well, that depends on your goals. How quickly do you wanna get rich? If you wish to become rich in a day, in a week, in a month, in a year or even in a decade. The answer seems easy, I want to become as fast as I can, but there’s a catch over here. The faster you want to become rich, the more likely it is you won’t. And we are not blaming you for the lack of skills, it's just that the odds are against you.
For example, say you wanna become rich in a day, then you have to decide which stock to trade, you have to have the necessary capital to purchase it. You are competing against the smartest people in the world to make money here. Say you get all the above steps checked, but then is time in your favor? You must sell by the end of the day. What if the stock takes a nosedive? Sure, you might hit the jackpot. It’s quite possible, but it’s not a practical way to earn money because it's a risky game to play. Secondly, if the stock moves in the opposite direction then the time available to bounce back to older prices (if it did) is also less. You see as you increase your investment horizon, you are essentially distributing your risk over time.
And this is exactly why there are different kinds of trading styles, and they are all on the basis of time.
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If you want to earn in the stock markets, then you should choose a trading style or investing methodology which best suits your risk tolerance. Some of these are:
Buy and Hold Strategy
Investors purchase stocks of strong companies and hold onto them for the long term, allowing their value to grow over time.Dividend Investing
Some investors focus on dividend-paying stocks, reinvesting dividends to benefit from both capital appreciation and regular income.Trading
Investors purchase stocks of strong companies and hold onto them for the long term, allowing their value to grow over time.
Risk isn't solely about timing
There's a real possibility that the stock you've pinned your hopes on could flop. That's why it's crucial to diversify your investments across various stocks and industries. By spreading your bets, you're less vulnerable to sector-specific or stock-specific risks. This enhances the long-term potential of your portfolio.
To sum up, it's quite possible to make money in the stock market given that you manage your risks appropriately, and let the magic of compounding happen.
We hope that we answered all of your doubts as to whether earning from the stock market is possible or not.
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Goodbye for Now, But Not Forever! Feel free to reach out with your thoughts, suggestions, or simply to say hello.
This is Prakash Bishnoi, Signing Off