The three main channels for stock profits and practical strategies

In an era of high inflation and declining fixed deposit interest rates, more and more people are turning their attention to the stock market. But making money in stocks is really that simple? Actually, there are three main profit channels, and the key lies in choosing the right method that suits you.

The Three Main Ways to Make Money in Stocks

Method 1: Dividend Income

When you buy stocks, you become a shareholder and have the right to share in the company’s profits. Some companies regularly pay cash dividends (like Coca-Cola), some issue stock dividends, and others reinvest the earnings to boost stock prices (like Berkshire Hathaway).

Holding stable, high-quality companies for the long term allows you to enjoy both stock price appreciation and regular dividends. However, be aware that the day after dividends are paid, the stock price typically drops by an equivalent amount, known as the “ex-dividend” drop. If the stock price recovers to pre-dividend levels, it’s called “filling the dividend,” and only then can investors consider themselves truly profitable.

Choosing stocks that can successfully fill the dividend gap is crucial. Also, beware of the “fake dividend” trap—when a company’s payout ratio exceeds 100% (earning 1 dollar but paying out more than 1 dollar), it’s essentially eating into its capital. For example, HTC once paid a cash dividend of 40 NT dollars, but the following year, profits plummeted, and the stock price crashed from 1,300 NT dollars to 200 NT dollars. Many dividend investors are still trapped in that position.

Method 2: Price Difference Arbitrage

This is the most intuitive profit method. Stock prices fluctuate constantly during market hours, allowing investors to buy low and sell high or sell high and buy back lower. Stock prices are influenced by multiple factors, including company performance, market sentiment, and circulating shares.

Typically, investors use fundamental analysis, news judgment, and technical indicators together to predict future trends. If you believe the stock will rise, buy in; once it reaches your target price, sell. Conversely, you can short sell if you expect a decline. The key to short-term trading is selecting the right stocks, and for shorting, setting strict stop-loss points—recommend closing the position if losses reach 15%.

Method 3: Lending Stocks for Income

This is a new passive income option. If you hold a stock long-term and are not concerned about short-term fluctuations, you can consider lending your stocks to those who want to short sell, earning lending fees. This way, you retain the right to dividends while earning additional income.

The downside is the loss of operational flexibility. Once stocks are lent out, if you want to sell during trading hours, you must recall the stocks first, making it unsuitable for short-term traders.

The Stock Market Is Full of Variables; Timing Is Key

Stock price fluctuations are affected by company operations, industry trends, major events, political situations, supply and demand, and more. Even professional fund managers, according to research, over 80% of them in the US stock market fail to beat the benchmark index over 10 years.

Investor psychology is also very important. The same stock can have vastly different views from buyers and sellers. Who can accurately predict the future? That’s the challenge of stock trading.

To make money in the stock market, besides knowledge and skills, you need firm conviction and a clear strategy:

• Avoid emotional trading; don’t be swayed by market volatility and public opinion
• Make rational decisions based on fundamentals, technical analysis, and market sentiment
• Strictly control position sizes and set pre-determined loss limits
• Clearly define each trade’s goal and timeframe; take profits immediately upon achievement, and avoid greed

How to Develop a Suitable Stock-Making Strategy for Yourself?

The most important thing before investing is to understand yourself. Different investors have different cash flows, time commitments, and risk tolerances, so there’s no one-size-fits-all strategy.

Conservative investors might consider:

Value Investing — Find undervalued quality companies and hold long-term until their value is restored. The core is to identify good companies, buy when undervalued, and patiently enjoy growth. Companies should have strong competitive advantages to withstand market fluctuations during holding periods.

Dollar-Cost Averaging — For long-term goals like retirement or education funds, invest regularly in broad market index ETFs or companies with long-term competitiveness. This approach automatically averages purchase prices, and as long as the market grows over time, your assets will steadily increase.

Investors with higher risk tolerance might consider:

Swing Trading — Capture price movements at specific times, such as holiday travel stocks or shopping festival e-commerce stocks. This requires paying attention to real-time news and judging entry points, suitable for investors who can monitor the market actively.

Day Trading — Buying and selling within the same day, without overnight positions. It requires integrating news and technical analysis to develop strategies based on support and resistance levels. However, it demands high operational skills.

Are There Many People Making Money in Stocks? The Reality Is Harsh

Online, you often see people sharing stock profit stories, seeming to make money easily. But remember, loss stories are rarely shared, and making money in stocks is far from easy.

According to Taiwan Stock Exchange data, over the past three years, the average retail investor lost 15.7%. In contrast, investors who used dollar-cost averaging to invest in 0050 (Yuanta Taiwan 50 ETF) for more than five years achieved up to 82% profit.

Long-term investing has an even higher success rate because as long as the company continues to operate, it can generate profits. Long-term investors can avoid individual company risks and rely on investing in the broader index, letting the market’s natural淘汰机制 filter out weaker companies. For example, with the S&P 500, you don’t need to predict which companies will be strongest in the next 10 years—just trust that the combined market value of the largest 500 US companies will continue to grow—history has proven this logic to be correct.

Short-term trading, on the other hand, is different. Frequent buying and selling incur high commissions and taxes, and most investors share a common bad habit: taking profits quickly when they make some gains, but holding on stubbornly when they lose, hoping to turn red—leading to small gains and big losses. Of course, there are experts in short-term trading, but they are the result of extensive effort and experience.

Conclusion

The stock market is vast, and first and foremost, you need to have a clear understanding of yourself. Knowing your risk tolerance, time commitment, and capital size will help you choose the stock-making strategy that truly suits you, enabling steady long-term profits. No matter how good the tools or how perfect the strategy, ultimately, success depends on execution and mindset. I hope this article helps you find your own investment path.