How to Make Money in Stocks? The Three Main Profit Channels and the Investment Strategy That's Best for You

In recent years, inflation has continuously driven up living costs, making traditional savings accounts insufficient to counteract asset depreciation. In this environment, how stocks make money has become a key concern for many. Compared to passive saving, active investing has become an essential financial skill for modern individuals. This article will delve into the core profit mechanisms of stock investing to help you find the most suitable way to make money.

Why Can Stocks Make Money? Understanding the Three Core Sources of Returns

The essence of how stocks generate profits comes from three distinct sources of income. Each method suits different types of investors; choosing the right one is the key to long-term gains.

You can profit from stock trading mainly through these three ways:

• Dividend Income — Owning shares to enjoy profit sharing
• Capital Gains — Buying low and selling high to capture market fluctuations
• Lending Income — Passively increasing assets by lending shares

Dividend Income — Holding Quality Companies for Long-Term Appreciation

When you buy stocks, you become a shareholder with the right to share in the company’s profits. Different companies have different dividend strategies: some (like Berkshire Hathaway) reinvest profits back into the business to drive stock price growth; others (like Coca-Cola) regularly return profits to shareholders in cash; some also use stock dividends, increasing the number of shares held over time.

The appeal of dividends is that you can profit not only from stock price appreciation but also from annual cash returns. Long-term investment in stable, high-quality companies, with dividends plus stock appreciation, often results in significant compound growth.

Beware of Dividend Traps — Not All Dividends Are Worth Receiving

Be aware that dividends are the transfer of company funds from its account to yours; the day after dividend payout, the stock price typically drops accordingly. If the stock price doesn’t recover the dividend amount promptly, it’s just a “hand-to-hand exchange,” which can lead to long-term losses.

The case of HTC (2498) is worth noting. In 2011, it paid a cash dividend of NT$40, but the following year, profits plummeted, and the stock price fell from NT$1,300 to NT$200. Many dividend investors are still stuck. This reminds us that high dividends do not necessarily mean good investments; the company must have sustainable profitability to support it.

Tax Considerations on Dividends

Investing in US stocks for dividends also involves tax implications. The US government withholds 30% tax directly from dividends, which is an invisible cost for Taiwanese investors. Therefore, sometimes focusing on capital gains rather than dividends can be more cost-effective.

Capital Gains — Seizing Market Fluctuations

Stock prices change every moment. The logic of buying low and selling high seems simple, but execution is challenging. Price volatility is influenced by many factors, including company performance, industry outlook, macroeconomics, supply and demand, and investor sentiment.

Three Methods to Predict Stock Price Movements

To forecast future rises and falls, investors typically rely on:

• Fundamental Analysis — Studying financial reports and competitive advantages
• Technical Analysis — Observing price trends and volume
• News Analysis — Tracking major events and industry news

If you expect a stock to rise, buy at a low price and sell at your target; conversely, you can also short sell if you anticipate a decline. However, even professional investors often make mistakes. Statistics show over 80% of fund managers fail to beat the market index over ten years, illustrating how difficult market prediction truly is.

Risks of Short-Term Trading

Short-term trading requires selecting liquid, volatile stocks. Short selling carries even greater risks; always set strict stop-loss points—immediately cut losses if the stock moves 15% against your position—to prevent unlimited losses.

Lending Income — Making Idle Assets Work for Passive Income

Besides buying and selling stocks and collecting dividends, there’s a third way to increase returns: lending stocks to earn borrowing fees.

If you plan to hold a stock long-term and are unaffected by short-term price swings, consider lending out your shares. This way, you retain dividend and capital gains benefits while earning additional lending income during the loan period, turning idle assets into passive income.

The Cost of Lending Stocks

The downside is that lending stocks reduces operational flexibility. Since the shares are borrowed out, if you want to sell at a certain price during trading hours, you need to recall the shares first. Therefore, frequent short-term traders may not find this feature suitable.

When Is the Right Time to Trade Stocks? Common Investor Mistakes

The stock market is full of variables and uncertainties, far more complex than most realize. It is influenced by company operations, industry trends, social events, political environments, supply and demand, and these factors are constantly changing, causing stock prices to fluctuate at all times.

Predicting the Future Is Always Challenging

For the same stock, one investor believes it will rise, another thinks it will fall—who is correct? This is the most difficult aspect of stock trading. Even seasoned professionals often fail to predict accurately. Data shows over 80% of fund managers cannot outperform the market index over ten years, highlighting the challenge of market forecasting.

Overcoming Emotions and Building a Rational Trading System

Achieving consistent profits in the stock market requires more than knowledge and skills; discipline and psychological resilience are crucial. Key principles include:

• Avoid Emotional Trading — Don’t be swayed by market swings or rumors
• Use Multiple Analyses — Combine fundamental, technical, and sentiment analysis
• Strictly Control Position Sizes — Pre-set acceptable loss levels to prevent overtrading
• Define Clear Trading Goals — Set specific entry and exit points and investment horizons before each trade

Many investors fail not due to lack of knowledge but because they cannot control greed and fear, leading to a cycle of small gains and big losses.

Different Investor Strategies — Find the Path That Suits You

There is no single answer to how stocks make money, as each person’s cash flow, risk tolerance, and available time differ. The most important thing is to understand yourself and develop a strategy that fits your profile.

Conservative Investors’ Strategies

Value Investing

This is the most classic approach—finding undervalued quality companies, holding long-term, and waiting for the market to recognize their true value.

Choose companies with solid moats—businesses with durable competitive advantages. If a company’s rise is only due to short-term positive news but lacks long-term competitiveness, it’s not worth holding long-term. The core of value investing: find good companies → buy when undervalued → patiently wait for the value to be realized.

Dollar-Cost Averaging

If your goal is long-term wealth accumulation (e.g., retirement or education funds), consider dollar-cost averaging.

Select a market or companies with long-term growth potential, and invest a fixed amount monthly in index ETFs or quality stocks (like Apple, Microsoft, Amazon). This approach automatically averages your purchase price over time, and as long as the market continues to grow, your assets will appreciate steadily. Data shows that investors using dollar-cost averaging into Taiwan’s large index funds for over five years achieved an 82% profit rate.

Aggressive Investors’ Strategies

Swing Trading

Some stocks exhibit significant price swings during specific periods, such as travel stocks during holidays or e-commerce stocks during shopping festivals. These swings last days to weeks.

Swing trading requires paying close attention to real-time market information, judging when a stock is in an upward trend, and estimating how long the rally can last. Frequent monitoring makes it more suitable for investors with time to follow the market.

Day Trading

Day trading involves buying and selling within the same day, without overnight positions. This method suits investors who can watch the market during trading hours.

Day trading mainly relies on technical analysis, identifying support and resistance levels. For example, buy when breaking resistance, or short when falling below support. Since the fundamental situation doesn’t change much during the day, both long and short positions can be profitable.

Long-Term Investment vs. Short-Term Trading — Who Is More Likely to Make Money?

Can stock investing really make money? Many online investors share their gains, but a hidden truth is that few openly share their losses—making profits is never easy.

Real Performance of Retail Investors

According to Taiwan’s Stock Exchange statistics, the average retail investor has lost 15.7% over recent years. In contrast, those employing dollar-cost averaging have achieved much better results. The difference stems from investment strategies and trading frequency.

Advantages of Long-Term Investing

Long-term investors tend to earn higher profits because companies that operate continuously generate profits. As long as you avoid catastrophic mistakes (like investing in bankruptcies or industries in decline), holding broad market indices over time allows you to share economic growth.

For example, investing in the S&P 500 index doesn’t require predicting which companies will be the strongest in ten years; just trust that the top 500 US companies’ total market cap will surpass today’s. Given the long-term capital flow into quality assets worldwide, this assumption generally holds.

The Trap of Short-Term Trading

Conversely, frequent short-term traders tend to have higher loss rates due to:

• High transaction costs and taxes eating into profits
• Psychological biases—“Take quick profits when up, hold on when down”—leading to small gains and big losses
• The difficulty of market prediction, making it hard for retail investors to outperform over the long run

While there are masters of day trading, mastering it requires significant effort and experience.

Conclusion: Find the Stock Investment Path That Fits You

There’s no one-size-fits-all answer to how stocks make money. Successful investors first understand themselves—know their risk tolerance, available time, and financial goals—and then choose strategies accordingly.

Whether you are a conservative dividend investor or an aggressive short-term trader, the core principles remain: avoid blindly following others, build discipline, and strictly manage risks. Choosing a reliable, transparent trading platform is also crucial.

Remember, stock investing is a long-term journey of wealth accumulation, not a gamble for overnight riches. By selecting a strategy that suits you and sticking to it, you can continue to harvest gains in the stock market.