What is the easiest way to make money from the stock market?

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pnrjulius eNotes educator| Certified Educator

The fluctuations of the stock market are largely unpredictable. Indeed, there is a theory called the efficient market hypothesis which says that they are completely unpredictable, because all publicly-available information about future stock prices is automatically incorporated into the current price by the functioning of the market.

Personally I consider the efficient market hypothesis far too strong. Human beings are not completely rational, and we often engage in behaviors like following the herd or being overconfident that can lead to systematic distortions in the prices of stocks and other assets. Thus, stock prices are not completely incorporating all available information, and it is possible for investors with very detailed knowledge and sophisticated forecasting methods to predict the stock market at least with accuracy better than chance. (An example of someone doing this successfully is Warren Buffett, who has averaged an annual return over 20% for decades while most people get about 5% and the market as a whole gets 7%.)

You, however, are unlikely to have access to the kind of detailed information and complex forecasting models that someone like Warren Buffett has. Thus, you should probably treat the stock market as a random system, which obeys a fat-tailed distribution, meaning that it sometimes doesn't change at all and other times swings wildly in all directions for no apparent reason.

You could therefore place risky bets on this system, hoping to get lucky, and that would indeed be the easiest way to make money on the stock market, and you could in fact win big and become a millionaire overnight--but it is also extremely risky, and you are just as likely to lose as you are to gain.

The safer bet is to diversify, and try to invest in as broad a portfolio as you can. Rather than choosing individual stocks, you are better off buying broad exchange-traded funds, or ETFs, that invest in a wide variety of stocks simultaneously. By buying ETFs that follow the Dow Jones Industrial Average or the S&P 500, for example, you can get a return that closely approximates the average return of the stock market as a whole--which as I said is a couple of percentage points higher than what most people get when they try to pick stocks on their own.

Will this make you a millionaire overnight? Absolutely not. But it also won't cause all of your money to suddenly evaporate. A diversified portfolio is the best way to grow your savings while still maintaining a moderate level of risk.

In other words, don't try to be like the people who made 1000% returns; they just got lucky. Don't try to be like the people who make 20% returns; they have access to tools you don't. Just try to make 7% returns; that's the safe bet that will actually pay off.