Quick Money Investing: Strategies For Fast Returns

Making a quick buck by investing in the stock market is a risky endeavour. While there are many ways to make money in the stock market, the potential for high reward comes with a high risk of losing some or all of your investment.

One of the riskiest ways to make money quickly in the stock market is to become a day trader. Day traders move in and out of stocks rapidly within a single day, sometimes making multiple transactions in the same security. While day trading can be profitable for nimble and proficient traders who can anticipate market trends, it is estimated that up to 95% of day traders lose money.

Another aggressive strategy is short selling, which involves betting that a stock's price will fall. Short sellers borrow shares of stock, sell them, and then buy them back at a lower price. While this can be profitable if the stock price falls, it is a risky strategy as the long-term trend of the market is strongly upward.

Speculating on over-the-counter stocks is another way to make or lose money quickly. These stocks don't trade on a public exchange and often sell for pennies per share. While many of these companies go bankrupt, they can offer the chance for investors to double their money based on rumour and innuendo. However, the OTC markets are full of hype and fraud, with touts pumping up stock prices before selling out.

Investing in meme stocks like GameStop and AMC Entertainment can also lead to huge gains or devastating losses. These stocks have experienced steep declines and sudden surges, and investing in them is not a solid long-term financial plan.

While these strategies may be tempting for those looking to make a quick buck, the best and safest way to generate real wealth in the stock market is to take a long-term approach and let compound interest work its magic.

Day trading

Day traders employ various techniques, such as technical analysis of price moves, to inform their buying and selling decisions. They require a high degree of self-discipline and objectivity and must adhere to strict rules about position sizing and employ stop-loss orders to limit potential losses. Day trading can be lucrative, but it is challenging and often a losing strategy for novice investors.

Requirements for day trading

In the US, pattern day traders—those who execute four or more day trades within five business days—must maintain a minimum account balance of $25,000 and can only trade in margin accounts. These rules aim to protect inexperienced traders from taking on too much risk.

Strategies for day trading

Day traders use a range of strategies, including:

• Technical analysis: Analysing past prices and trading patterns to predict future trends.
• Momentum trading: Capitalising on short-term trends and reversals to capture quick gains.
• News-based trading: Seizing trading opportunities arising from heightened volatility around news events or headlines.
• Scalping: Making many small profits on temporary price changes throughout the day.
• Range/swing trading: Buying when an investment's price is low and selling when it gets close to the high end of its normal range.

Advantages of day trading

• Potential for quick profits: Every successful trade can result in a profit.
• Easy access: Modern brokerage platforms have made day trading more accessible.
• Excitement: Day trading offers a level of excitement not found in long-term investing.
• No overnight risk: Day traders typically close all positions before the market closes, avoiding overnight losses.
• Work for yourself: Some professional traders make a living from day trading.

Disadvantages of day trading

• High probability of losses: Day trading is high-risk, and most day traders lose money.
• Fees and taxes: Trading costs and short-term capital gains taxes can eat into profits.
• High stress: The fast-paced and volatile nature of day trading can be stressful.
• Time-consuming and challenging: Day trading demands a significant time commitment and can be challenging, even for experienced investors.
• Requires deep pockets: Financial regulations require a minimum of $25,0000 in a brokerage account for day trading.

In summary, day trading can be a quick way to make money in the stock market, but it is not suitable for everyone. It requires significant knowledge, discipline, and risk tolerance, and even then, there is no guarantee of success.

Short-selling

• Open a margin account: You need a margin account to borrow shares from a broker. Margin accounts require minimum balances, called the maintenance margin, to cover potential losses. You will be charged interest on the borrowed shares.
• Identify a stock to short: Look for stocks that you believe will decline in value by analyzing financial reports, industry trends, technical indicators, or broad market sentiment.
• Locate borrowable shares: Your broker must locate shares that can be borrowed before you can short-sell. This is usually done automatically by brokerage firms.
• Place the short sale order: Enter a market or limit order to short the stock through your brokerage platform.
• Monitor the position: Keep an eye on the stock's performance. If the stock price increases, your losses can grow.
• Close the short position: Buy back the borrowed shares and return them to the lender. Ideally, you will repurchase the shares at a lower price, profiting from the difference.
• Review the trade outcome: Analyze the outcome of the transaction to refine your strategy for future short-selling opportunities.

Timing is crucial in short-selling. It is generally more profitable to short-sell during a bear market or when a stock's fundamentals are deteriorating. Short-selling is a speculative strategy with a high risk/reward ratio, and it may not be suitable for beginners.

Speculative, over-the-counter stocks

There is a lot of hype and fraud in the OTC markets, with plenty of touts pumping up stock prices so they can sell out before the inevitable crash. As such, this strategy is not recommended for the average investor. However, if you are looking for a small percentage of your portfolio to devote to high-risk, high-reward investments, OTC stocks may be worth considering.

It's important to remember that investing in the stock market is a long-term strategy for most people. While short-term profits are possible, the safest way to generate real wealth is to stay in the market for the long term and let compound interest work its magic.

Meme stocks

The first successful meme stock was GameStop Corp (GME), which saw its share price increase by up to 100 times over several months. Other examples of meme stocks include AMC Entertainment Holdings, Blackberry Limited, Bed Bath & Beyond Inc., and Koss Corp.

Meme stock investors have developed their own vernacular, with terms such as "diamond hands", referring to an investor who holds onto a stock despite significant losses, and "paper hands", referring to those who sell their shares despite losses.

While it is possible to make money with meme stocks, it is an extremely risky venture. Meme stock investing relies on trying to time the market, and it is difficult to know which stocks will perform well.

Long-term investing

Adopt a Long-Term Perspective

Avoid the temptation to make quick trades based on short-term market movements. Instead, focus on finding solid investments that align with your financial goals and hold them for the long term. A disciplined approach, such as dollar-cost averaging, can help you stay invested during market downturns and take advantage of buying opportunities.

Don't Chase Hot Tips

Resist the urge to invest based on tips or rumours. Conduct your own thorough research and analysis of a company before investing. Understand the company's business, how it makes money, and its potential for future growth. Make investment decisions based on your own informed judgement rather than relying on others' opinions.

Don't Sweat the Small Stuff

Don't get too caught up in short-term volatility and minor price movements. Focus on the big picture and the long-term trajectory of your investments. Avoid making impulsive decisions based on short-term market fluctuations.

Look Beyond the Price-to-Earnings (P/E) Ratio

While the P/E ratio is a valuable metric, it shouldn't be the sole factor in your investment decision. Consider other factors such as growth rates, market position, and industry-specific contexts. A high P/E ratio doesn't always indicate an overpriced stock, and a low P/E ratio doesn't always mean a stock is a bargain.

Resist the Lure of Penny Stocks

Penny stocks, typically shares trading for less than $5, may seem like attractive bargains, but they often come with high risks. These stocks often reflect underlying business problems and tend to be less regulated, making them more volatile and speculative.

Pick a Strategy and Stick With It

Develop a clear investment strategy that aligns with your goals and risk tolerance. Whether you focus on value investing, growth investing, or dividend investing, consistency is key. Stick to your chosen strategy through market ups and downs, rather than chasing short-term trends.

Focus on the Future

Base your investment decisions on a company's future potential rather than its past performance. Look for companies with strong growth prospects and evaluate their long-term fundamentals. Remember that past data doesn't guarantee future results.

Sell the Losers and Let the Winners Ride

One of the challenges in investing is knowing when to sell. Avoid the common mistake of selling winning investments too early and holding onto losing investments too long. Evaluate each investment on its merits and be disciplined in cutting losses and letting your winners run.

Keep Taxes in Mind

While taxes shouldn't be the primary driver of your investment decisions, be mindful of the tax implications. Long-term capital gains taxes are generally lower for investments held for more than a year. Consult with a tax professional to understand the tax consequences of your investment decisions.

Know Your Investment Risk Tolerance

Understand your risk tolerance and set appropriate limits. Know your emotional and financial limits for handling market volatility. This will help you make rational investment decisions and avoid impulsive actions during market downturns.

Diversify Your Portfolio

Diversification is a key principle in long-term investing. Spread your investments across different asset classes, industries, and markets to reduce risk. A diversified portfolio can provide a wider range of growth opportunities and help protect against significant losses in any one segment.

Adjust Your Strategy When Needed

Regularly review and question your investment strategies. Markets and economies are dynamic, and your investment approach should evolve with changing conditions. Be open to making adjustments when necessary, but avoid being overly fickle or reacting to short-term fluctuations.

Stay Focused on Your Long-Term Goals

Keep your long-term financial goals in mind and don't let short-term market volatility distract you. If your investment horizon is decades away, intraday or short-term market movements are less relevant. Stay focused on your objectives and avoid making impulsive decisions based on fear or greed.

Frequently asked questions