We've all heard about that guy who doesn't work 9-to-5 but still makes a lot of money from investing in the stock market. With stories of self-made millionaires circulating the internet, many dream of living off their stock market investments. From day traders who profit from small price fluctuations to long-term investors banking on dividends and capital gains, it seems like an enticing proposition. You might wonder, can you make a living off of stocks? And, if so, exactly how can it be done?
In this article, we'll explore the different ways people attempt to live off their stock investments, the financial realities of each approach, and whether it's truly possible to rely on stocks alone for daily living expenses. We also asked some experts to provide some tips for those who want to embark on this journey.
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Do people make a living off trading stocks?
Yes, some people do make a living trading stocks, but making a living from stock trading requires extensive training and experience. Many professional traders spend years honing their skills and developing effective strategies.
Earning a living through stock trading demands a high level of expertise, a well-defined strategy, and the ability to manage substantial risk. Their strategies, skills, and tolerance for risk vary widely.
Successful stock traders often develop specialized strategies based on technical analysis, market trends, and economic indicators. Trading stocks can be highly risky. The potential for high returns comes with the possibility of significant losses.
Professional traders must have a strong risk management strategy in place, and be emotionally resilient, because the volatility and pressure of trading can lead to psychological stress and decision-making challenges.
To trade stocks professionally, substantial capital is often required to absorb potential losses and capitalize on market opportunities. Many successful traders also use leverage, which can amplify both gains and losses.
How much can you realistically make from stocks?
Can you make a lot of money in stocks? Maybe. It depends not only on your knowledge and instincts, but on factors like your initial investment, risk tolerance, and the time you’re willing to commit to investing.
“The average stock market return is around 10% annually, but that's not guaranteed year to year,” says Steven Kibbel, financial planner and Chief Editorial Advisor at Gold IRA Companies. “Skilled traders might aim for 15-20% returns, but consistency is a huge challenge. For most people, it's more realistic to use stocks as part of a broader income strategy rather than relying on them entirely.”
If you invest $100,000 in a diversified portfolio, you could expect to earn $7,000 to $10,000 a year, assuming the market performs with a return of 7-10% annually.
Day traders or swing traders may aim for higher returns, but they also take on more risk. The more frequently you trade, the higher the likelihood of losses, especially due to commissions and fees.
In contrast, dividend or index investing generally offers more stable, long-term growth but may not generate enough short-term income to live on unless you have a sizable portfolio.
So, how much money can you make from stocks in a month? The monthly earnings from stocks can vary dramatically depending on your strategy (we will deep dive in these later):
- Day traders: Some professional day traders make anywhere from $1,000 to $5,000+ a month, but this is highly dependent on market conditions, the amount of capital they’re working with, and their level of expertise. For most beginners, it’s more likely they’ll experience losses rather than consistent gains.
- Dividend investors: Monthly dividend income will depend on the yield of your portfolio. If you have a portfolio of $500,000 yielding 4%, you can expect around $1,667 per month. However, dividends are typically paid quarterly, so the monthly figure may vary.
- Long-term investors: For those following an index or buy-and-hold strategy, the focus is more on annual returns rather than monthly income. You may not see regular monthly payouts unless you're investing in dividend-paying stocks.
Let’s cut to the chase: Can you live with just stocks?
Living solely off stocks is possible, but it requires careful planning, significant capital, and managing risk effectively.
“The concept of earning enough to make ends meet by only purchasing stocks is very appealing but does not take into account the potential timeline of such an undertaking,” Garcia says. “In most cases, those that have made such trades often ignore the usual cardinal rule which is having first raised a good amount of cash as their starting capital, and making the compound growth for several years before cashing in.”
Below are three fundamental factors to consider if you are wondering, “Can you make a living just from the stock market?”
Portfolio size
To live comfortably, your portfolio needs to generate enough income to cover your expenses.
For instance, using the 4% rule—commonly used in retirement planning—an investor with a $1 million portfolio could withdraw $40,000 per year. If your living expenses are higher, you’ll need an even larger portfolio.
Market volatility
Stock market investments are subject to market volatility, which means your income stream could fluctuate dramatically. In a down market, your portfolio may lose value, reducing the amount you can safely withdraw without depleting your principal.
Taxes and fees
Don’t forget that stock income is subject to taxes. Whether you're earning dividends or capital gains, Uncle Sam will want his share, and these taxes can chip away at your earnings.
Additionally, frequent trading leads to higher transaction costs, which can erode profits.
Strategies for trading the stocks
Professional stock traders typically employ different approaches, including day trading, swing trading, and long-term investing, each with its own set of challenges and requirements.
Let’s deep dive into the most common approaches:
Day trading
Some people who want to live off stock trading engage in day trading, which involves buying and selling stocks within the same trading day, often making multiple trades to profit from small price movements.
The prevalence of day trading has surged, especially with the rise of online brokerage platforms like Robinhood. In 2020, Robinhood reported over 13 million users, many of whom engage in day trading.
“Though it can be profitable at times, it can also be very stressful and requires a lot of focus and risk,” says Adam Garcia, financial consultant and founder of The Stock Dork. “The majority of day traders in fact lose money because of so many trades and the transaction costs associated with them.”
Reality check: Successful day traders can make a living, but it requires significant time, experience, and a deep understanding of market trends. According to data based on the success rate of day trading at a proprietary trading firm over six years by a Chartered Market Technician (CMT), only about 4% are able to earn enough to cover their living expenses over the course of a year.
Day traders also face high commissions and taxes that can eat into their gains, since every transaction comes at a cost. Without a solid strategy and discipline, living off day trading can be challenging.
Swing trading
Swing traders attempt to profit from short-term price swings, taking positions that last from a few days to several weeks. Unlike day traders, swing traders don’t have to be glued to their screens all day, allowing them more flexibility.
Sources of financial content on the web like Investopedia and TradingView report significant user engagement with swing trading strategies, as people attempt to capitalize on market "swings" over days or weeks.
Reality check: Swing trading is less stressful than day trading but still carries significant risk. It involves holding positions for several days to weeks, aiming to profit from short- to medium-term market movements, and requires a solid understanding of technical analysis, chart patterns, and market trends.
While it does demand attention and skill, traders are not required to constantly monitor the market throughout the day, which can reduce the emotional and psychological strain associated with day trading. However, swing traders still face significant risks, as market fluctuations can impact their positions over several days, potentially leading to losses that offset gains.
Dividend investing
Dividend investors buy stocks in companies that regularly distribute a portion of their profits to shareholders in the form of dividends. If the dividends are substantial, some investors can live off this income.
A 2023 Global Dividend Study by Janus Henderson showed that global dividends reached a record high, highlighting the increasing trend of companies returning value to shareholders through dividends.
Reality check: Dividend investing offers more stability than trading, but if you don’t have an exceptionally large portfoilio, the income may not be enough to live off of.
For example, if you want to earn $50,000 per year from a portfolio yielding 3%, you’d need to have about $1.67 million in stocks.
Index investing
Index investing involves buying and holding shares in funds that track a market index like the S&P 500. Over time, index investors rely on the overall growth of the market to increase the value of their investments.
Reality check: Index investing is a long-term strategy. Vanguard, one of the largest investment management companies, suggests that investors in index funds should have a time horizon of at least five to 10 years to align with the investment strategy’s benefits. “The longer your time frame, the more time to potentially benefit from the power of compounding, where your earnings generate their own earnings over time,” Vanguard states in their How-to-start-investing guide.
While historical data shows that the stock market tends to grow over the long run, relying solely on this method for immediate living expenses may not be feasible.
Index investing is often considered a strong strategy for retirement investing: it has lower expense ratios compared to actively managed funds. Lower costs can lead to higher net returns over the long term, which is beneficial for retirement savings that need to grow over decades.
Long-term investing remains the most common method of stock market participation. According to the Federal Reserve, over half of U.S. households own stocks, mainly through long-term retirement accounts like 401(k)s and IRAs.
5 tips to create a plan and prepare for living off trading stocks
If you're serious about making a living from stocks, here are some tips to help you prepare:
- Diversify your portfolio: Don’t rely solely on one type of investment or strategy. “Diversify your investments to spread risk,” Kibbel says. “Consider a mix of growth stocks, income stocks, and other assets.”
- Have an emergency fund: Stock market income can be unpredictable. It’s essential to have a cash reserve to cover expenses during periods of low or negative returns.
- Set realistic expectations: Don’t expect to get rich overnight. Stocks can be a great way to build wealth, but it takes time and patience. “Don't quit your day job until you have significant savings and a proven track record of profitable trading,” Kibbel says.
- Stay educated: The stock market is constantly evolving, and staying informed about market trends and economic changes is crucial. You could use platforms like CNBC, Bloomberg, and The Wall Street Journal to get up-to-date news on market trends, stock movements, and economic updates. Subscribing to alerts or newsletters from these sources can keep you updated.
- Consider professional advice: If managing your investments full-time seems daunting, consulting a financial advisor can help you create a sustainable plan. “Don't be afraid to seek professional guidance,” Kibbel says. “Even as a financial planner myself, I recognize the value of multiple perspectives when it comes to investing.”
“In preparing themselves for the ultimate and realistic concept of living off stock trading then it is wise to begin with a proper strategy of money,” Garcia adds. “Employ the necessary flexibility and make modifications on a constant basis depending on the economy and stress levels among others.”
So, can you make a living off investing in stocks? You can, but keep in mind it requires careful planning, a strong risk tolerance, and a significant financial cushion.
FAQs
Can I make a living trading stocks part-time?
While it's possible to generate income from part-time trading, making a full-time living requires more time, expertise, and commitment. Most part-time traders use it as supplemental income rather than their primary source of earnings.
How much money do I need to live off stocks?
The amount depends on your living expenses and the type of stock strategy you're using. For example, dividend investors typically need a portfolio of $1 million or more to generate a comfortable annual income.
What are the risks of trying to live off stocks?
Stock market risk, including market volatility, company-specific risks, and potential capital loss, are significant concerns. Other risks include taxes, fees, and the temptation to take on too much risk to achieve higher returns.
How long does it take to make money from stocks?
The time it takes to make money from stocks varies based on the investment approach. Day traders, who buy and sell stocks within a single day or over a few days, can potentially make profits quickly by capitalizing on short-term price fluctuations.
For long-term investors, it can take several years to see substantial returns. Investing in index funds or holding stocks over the long term allows for growth as companies and markets generally increase in value over time. While short-term market swings can result in temporary losses, historical data shows that long-term investors tend to see positive returns over periods of five to 10 years or more.