While the stock market returns vary from year to year depending on inflation, among other factors and forcing the returns on stocks below the 10% average return before factoring in inflation, an investment in stocks is one of the best investment options you could put your money into.
So, before we look at the amount of money you could make from stocks in one month, let’s look at some basics first.
How Much Can You Make from Stocks in A Month
The Historical Market Return
While the 10% average is often unattainable with the numbers going or down depending on the external economic conditions, an understanding of the 10% benchmark is important.
Generally, the S&P 500 Index features 500 of the leading publicly-traded companies, and it is the measures used to determine the annual returns. Therefore, every time investors mention ‘market,’ what they really mean is these top 500 companies, and the average 10% return is the headline rate or rather the rate that’s reduced by inflation.
Currently, the loss of purchasing power for investors stands at 2-3% annually, thanks to inflation. But it doesn’t mean that we should all give up in the stock market. The truth is that the stock market is one of the best long-term investment options. So, as long as you don’t need that money in the next 5-10 years, then investment in stocks is one of the best decisions you’ll ever make. Even with changes in inflation rates, the average return for good stock will be pretty good. And even when the market is at its highest volatility state, the returns always tend to be positive in the good years, and a drop wouldn’t cause significant changes in your returns.
The other factor that determines returns from stock is the time you invest your money in a specific stock. Generally, your returns on a good 10-year stock investment for the S&P 500 would average 8% and 9.5% for a 15-year investment.
But even with these average returns, the investor will always earn less than the market return.
And going by these numbers, a good investment in stocks would result in a 7%-10% growth in your investment each year, over a good number of years. Simply put, a £10,000 investment in the stock market today would turn into £20,000 in 10 years. Of course, the earnings are lower per month, which is why investing in stock is recommended for individuals looking for a long-term investment solution. We wouldn’t recommend investing in stocks if you are looking to make good money from the stock markets, well, unless you are a day trader.
To understand these variations, we look at the main factors that affect how much you’d make from stocks.
Factors Affecting Stocks Returns
Stock prices are affected by the marketplace or, rather, the place where the seller’s supply meets the buyer’s demand. The interesting bit, however, is that the forces of demand and supply aren’t the only things that determine how much you’d make from investing in stocks.
There are far stronger forces affecting your favorite investment market, and though these forces don’t tell everything you need to know about the stock prices, they affect the movement of stock prices up or down. These forces can be grouped into three main categories – the fundamental factors, the market sentiment, and the technical factors.
The Fundamental Factors
These are the factors that affect the stock prices in what is regarded as an efficient market. But what exactly are the fundamental factors?
Essentially, these factors are broken into two – the earnings base like the EPS/ Earnings Per Share and the Valuation Multiples like the P/E Ratios.
For example, if you claim earnings from your common stock, your return on investment is based on the EPS. And when you buy new stock from a new position or on top of your existing stocks, then you will be purchasing a stock that is a proportional share of the entire future earnings streams. Confused? Well, don’t be because this is where the valuation multiple principles comes in – the valuation multiple represents the price you’d be willing to pay for all the future earning streams.
In this case, the part of your earnings would be distributed as dividends with the remainder of your investments retained by the company on your behalf as your reinvestment. Therefore, your future earnings streams would be the function of both the current level earnings plus the expected growth in your earnings base.
The Earnings Base
EPS is an accounting measure, and although we are using it here, you need to keep in mind that there are several other measures that you could use to determine your stocks’ earning power; and some financial experts regard the cash-flow measures as superior alternatives in the determination of the earnings power.
While there are differences in the determination of the earnings power, you need to look at the company and industry you are interested in to determine the best approach used to determine your earnings power. For example, if investing in REITs, then you need to know that this industry determines the earnings power of stocks by looking at the Funds from Operations. On the other hand, if you are investing with one of the rather mature companies, then the earning power of your stock would be determined by the value of Dividends Per Share, an actual representation of what the shareholder receives.
Expression of future expectations, the valuation multiple is a fundamental factor used to determine the future value of the stock for persons buying the stock presently. The valuation multiple is determined by the discounted present value of all future earnings streams.
It’s based on (i) the expected growth rate in the earnings base and (ii) the discount rate used it calculate the present value of all future streams of earnings.
With these numbers, if the growth rate of the earnings base is higher, it will earn the stock a higher valuation multiple, but the higher the discount rate, the lower the valuation multiple rates.
The reason for these changes in the multiple as brought about by the discount rate has to do with the fact that the discount rate represents the function of the perceived risk, and riskier stocks always earn a higher discount rate, resulting in a lower multiple. The discount rate is also an important function of inflation and the interest rate. A high inflation rate results in a high discount rate and a low multiple. In simpler terms, the high inflation, high discount rate means that the future earnings of the stock will not be worth as much if the environment is inflationary.
Technical Factors Driving Stock Prices
These technical factors represent a mix of the external factors affecting the effects of demand and supply. They include:
As mentioned above, inflation is a factor of the valuation multiple. However, as you try to learn more about the actual worth of stock, you will learn that inflation is one of the biggest drivers of the stock market, with low inflation rates correlating inversely with valuations where a low inflation rate drives up the valuation multiples and vice versa.
On the other hand, deflation is bad for the stock market since it signifies the loss of pricing power for investment companies.
The Economic strength of the market and the peers
Company stocks are often on track with the market, the sectors they are in, and the industry peers. As a result, some of the most prominent investment firms argue that the stock’s movement is determined by the marker and the sector movements, and not the individual performance of the company. With research showing that different market factors are responsible for over 90% of the stock movements, the sentiments of the top companies are close to the truth.
The incidental transactions refer to the sales or the purchases of stocks that are motivated by other things besides the actual intrinsic value of that stock. The incidental transactions include the executive insider transactions that are driven by the portfolio objectives and the pre-scheduled objectives. Institution buying and the shorting of stocks in a move to hedge out other investments are also incidental transactions. Generally, these transactions don’t reflect the official vote cast against or for the stock, but they have an impact on supply and demand, and they cause price movements.
Corporate bonds, commodities, government bonds, foreign equities, and real estate all influence stock prices, in one way or another.
Though very important, liquidity is often under-appreciated when it comes to the stock market. Liquidity represents the level of investor interest a stock attracts. If a stock is highly liquid and highly responsive, it means an average small-cap.
The other factors you need to look at include the market sentiments, trends, news, and demographics.
Things to Consider Before You Invest in Stocks (Dividend Stocks)
Whether you are approaching your retirement age and out there looking for the best place to invest or you are the 20-something-year-old that’s always prepared, investment in dividend stocks is one of the best investment options. Dividend stocks not only hold significant potential for growth, but they also give you cash on the regular. But even with all the promises held by the dividend stocks, you must be aware of some things:
Understand the Rules
Different stocks play by different rules in terms of the dividend payouts. What this means is that beyond the regular stocks, you might want to understand the investing rules applicable to other classes of dividend-yielding investments like REITs (Real Estate Investment Trusts), MLPs (Master Limited Partnerships), and the BDCs (Business Development Corporations). These are high-yield investment classes, but they don’t apply the same dividend payout rules.
However, these options promise a 90% return in income as a dividend, and these investment companies are tax-exempt. The only catch is that you will earn great returns from this investment only if you put in a substantial amount of money in equity.
Beware of the coverage ratio
Always check the safety of the dividends before you invest. For this, you must check the payout ratio and the cash payout ratio. For example, a 25% payout ratio would mean a 75% reinvestment in the stock, debt payment, or stock buybacks. Either way, a lower payout ratio means safer dividends.
Once you’ve confirmed the safety of your dividends, you should assess the potential of the growth of the dividends and the stock. The growth rate is affected by different rates, but the most common factors you need to be aware of include the payout ratios, the company’s free cash flows per share and the subsequent growth of the same over time, as well as the competitive advantage of the company, margin expansion potential, the total addressable market and the management’s policies on capital allocation.
Tips for Day Traders
Even the smallest alternations in the stop loss and the targets have huge effects on the profitability of the stock and trades.
Price slippage is inevitable, and larger than expected losses are not unheard of. However, you could account for the slippage by reducing the next profitability figures by not less than 10%.
Adjustments are based on your win rate, the capital invested, slippage, commissions, and the average position sizes of your wins and losses.
Risk/ Reward Ratio – before buying stock, you need to know the difference between the price that you buy stock and your stop-loss point. The reason for this is that your reward will be the difference between the profitable exit price and the entry price, assuming there is no stop-loss. Selling a £20 stock at £25 gives you a £5 profit. The reward for the risk taken will be the reward divided by your risk. In this case, the £5 profit means a risk of 5 for a £1 risk.
Risk vs. Reward – as a reasonable trader in a reasonable market, your earnings would be 5-10X the amount risked on the trade. But to attain these numbers, you must be skilled and knowledgeable on all market matters.
Leverage – it can work for or against you. So, beware of the external factors that might affect the market prices. Some external variables have a bigger influence on stock performance than others. It is always easier to find the winning stocks when the market is hot than when the market is dead.
Capital – the capital requirements for the day trader depends on the state of the market. Generally, however, most traders start from £500. Before you put in your money, take your risk tolerance into consideration, as well as the leverage you have.
And never go into the day trading business with the gambler’s mentality – be ready to take losses.
Generally, a day trader would make about 20% or more each month. But even this percentage is too high going by the typical trading standards meaning that you shouldn’t get into day trading expecting huge earnings. You win some; you lose some.
To determine how much you’d earn from stocks in a month, you’d have to factor in all the factors above.