How to Invest in the Stock Market by robert kiyosaki

How to Invest in the Stock Market: 3 Approaches

You never truly get your diploma in financial education

So, you want to be a stock investor. The next logical question should be, “How should I invest in the stock market?”

The interesting thing is that most people only know of one way to invest in the stock market, so they never ask the question of how they should do it.

But the reality is that there are three main ways to go about stock investing. The trick to successful stock investments is to match your investing goals with the right investment strategies… and no, your investment goal can’t be simply to make money.

Three strategies for investing in the stock market

As a stock investor, there are three ways you can use the stock market to accomplish your goals:

  1. Capital gain: buy a stock share at a low price and sell it at a higher price — the difference between your buy and sell price is your gross profit

  2. Cash flow: have a stock portfolio that pay out dividends or buy a stock share and option it to earn income for ongoing cash flow

  3. Hedge: buy insurance (options) on your stock share to protect it

All three of these are valid actions. It’s important that you know about these different strategies so you can make smart decisions.

Ask yourself this important question: “What are my investing goals? Is one of them to increase my net worth? If so, what investments should I buy to accomplish this?”

Investing in the stock market for capital gains

If stock investors want to increase their net worth with stocks, they can buy shares and hold them in their portfolio, hoping they increase in value. Many people are already doing this through retirement plans such as a 401(k), an IRA, and mutual funds.

We’ll talk about it later, but this is the most common way to invest in the stock market. It’s what most people have in mind when you talk about how to invest in the stock market. And it’s also the worst way to do it.

Investing in the stock market for cash flow

If your goal is to generate cash flow, you may want to use the strategy of selling options to meet your cash flow goal. Cash flow is valuable to you because it’s how you are able to feed your family and pay your bills.

Simply having an asset that increases your net worth does nothing to improve your cash flow situation. There are many people who are rich on paper but poor in cash. Lots of people found that out the hard way when the dot com bubble popped in the early 2000s. Thousands of “millionaires”, people who had stock options in high-flying tech companies, became “poor” overnight. That’s why Rich Dad encourages people around the world to think differently and seek assets that give them cash flow.

When you have assets that generate cash flow for you, it can help you now and through retirement. Remember: Net worth doesn’t help you retire; cash flow does. Your net worth doesn’t pay the bills; the cash that comes into your bank account each month does.

That’s an important distinction to make. If you are selling options on your stocks, that is cash flow that goes into your income statement. It’s an important addition to your income statement that can transform your life.

If you want to learn more about how to use options in stock investing, you should read my Rich Dad Advisor, Andy Tanner.

Investing in the stock market by hedging

Your third investing strategy is hedging, which is essentially buying insurance on investments. When you buy an investment such as a house, you certainly don’t want to lose that investment. No matter the reason behind your purchase, it’s important to protect it. If the house burns down, the insurance you bought guarantees that your investment will be safe.

Hedging is simply a purchase that protects you if something bad happens to your primary investment. So, if your goal is to protect what you have, then hedging is the strategy you’ll want to deploy.

Buying insurance doesn’t put money in your pocket. It’s an expense. But smart investors protect their investments with insurance.

Many people don’t realize that you can buy insurance on your stock investments, but you can. Just as you can use stock options to gain cash flow, you can also use them to protect against lose in your stock portfolio.

To learn more about this exciting approach on how to invest in the stock market, read Rich Dad Advisor Andy Tanner’s book, “The Stock Market Cash Flow: Four Pillars of Investing for Thriving in Today’s Markets.”

How professionals vs. amateurs invest in the stock market

The two biggest differences between professional and amateur stock investor are:

  1. Amateurs are always going for the capital gain, and professionals go for cash flow.

  2. Amateurs are always trying to hedge or protect themselves with diversification, but professionals use option contracts like insurance.

Capital gains vs. cash flow in stock market investing

Let’s take a look at the difference between investing in the stock market for capital gains vs. cash flow.

Maybe you want to buy stock in Acme and you buy it at $100 a share. Let’s say that after a while Acme is now worth $200. Now your net worth’s gone up. You have more money than you did before. Your “assets” have grown, but Acme has not given you any income; there’s no cash flow from it.

While it’s nice to have an asset worth more than when you bought it, it could very easily go down again. If you need help to pay your bills or mortgage, it will make no difference if your asset is worth more. The only way it can help you is if you sell it… and then you no longer have an asset, just cash.

But suppose you buy a stock that pays you a regular dividend. Now you own an asset that is also adding to your cash flow without you having to do a thing for it. With enough assets like this, you can eventually have the income to do whatever you like right—now or in retirement. In my opinion, that should be the overall goal of investing: freedom of choice and lifestyle.

Most common retirement plans are based on capital gains

Today’s typical retirement plans, such as the 401(k), don’t provide you with cash flow. Instead, the focus is usually trying to build a net worth that is large enough to support retirement—and that is very hard to do. Many people are concerned that their money will run out before their time on earth does. Most mutual funds are not created to provide you with cash flow. Instead, they simply add—or sometimes subtract—from your net worth. But they are not giving you income.

For some new investors, this is a difficult concept to understand. We are trained by the media and Wall Street to equate net worth growth with investing success. But let’s look at a familiar situation that illustrates why net worth may not be the best investing goal.

Suppose you have monthly bills of $4,000. Well, having your net worth go up and down isn’t really going to matter. You need to cover these expenses every month. You need income-producing assets to produce cash that helps crack this nut. If you can get $4,000 in cash flow coming from assets, you can be independent of a job. Now, that’s a goal! That is wealth. Wealth is when you have passive income to cover your $4,000 in expenses. Cash flow is the key to wealth.

If you have a high net worth, you may be rich but you may still have to work. You can be rich in net worth and not be able to pay your bills. You can have a million dollars in a 401K and not be able to cover your monthly-expenses for the rest of your life.

But if you have passive income that exceeds expenses, then you’ve become independently wealthy. In other words, you have enough wealth to be independent from having to work.

Original publish date: September 29, 2015