How do traders make money?

There are many markets, strategies and styles of how traders make money. In general, traders make money by speculating on the rise and fall of prices of financial instruments. Traders often speculate in a variety of markets: stocks, options, forex, cryptocurrency, commodities, fixed income and other derivatives.

Traders place buy and sell orders that ultimately result in a profit if their trading thesis is correct and a loss if it is not. Below we will give a comprehensive explanation of the different ways traders make money.

Various markets where traders can make money

There are many markets where traders can participate along with other buyers and sellers to make money. You've probably heard of the stock market, options market, forex market, cryptocurrency market, futures market or commodities market. Each market offers different financial instruments that traders can buy and sell to profit from price changes.

We will look at these different markets and how a trader makes money in each of them.

Who is a stock trader and how do they make money?

Stock traders are individuals or groups who make money from the rise or fall in the price of a company's shares through buying and selling. The amount of money a stock trader makes is determined by a) the size of their position (in stocks) and b) the dollar value when stock prices move in their favor.

Some basic ways to make money as a stock trader:

Buy low, sell high

This is a method by which stock traders seek to buy a stock when it is cheap and sell it at a higher price in the future.

Imagine it's 1998 and you think Amazon could be worth a lot more in a couple of decades than it is now. You decide to buy $5000 worth of Amazon stock at $5 per share, which is 1000 shares. Two decades later, you return to your trading and find that Amazon's stock price is now over $2500 per share. You have 1000 shares of Amazon stock, and at $2500 per share, your initial investment of $5K is worth $2,5 million.

You bought Amazon when it was "low" and correctly guessed that it would go up in value, so you sold it for more. This is one of the simple ways to buy low and sell high.

Short sale

Another way to make money on stocks is what we call short sales . This is the opposite of the example below. The goal here is to sell high and buy low.

Let's pretend it's 2007 and you're worried about the housing crisis and how it might affect the banks that hold a lot of the heavily traded mortgage-backed securities.

You've found a Bear Stearns stock that you think is vulnerable to the housing crisis. It's currently trading at around $120 per share and you think it could go lower, so you decide to "short" the stock. Now, how do you sell shares that you don't own?

Technically, you "borrow" shares from someone who has them, then sell them, and then buy them back at a lower price, thus pocketing the difference.

Because you were pretty prescient and right that Bear Stearns would go down, over the next few months the stock fell from $120 per share to $60 per share, and you closed it with a profit of $60 per share.

This is how you short a stock.

Dividends

One of the unique ways to make money as a stock trader is by buying dividend stocks. Dividend stocks are shares of companies that pay quarterly or annually to their investors in the form of a “dividend,” which is a small distribution of cash from the company to shareholders. This is done as a reward for owning their shares. The dividend a shareholder receives is often a percentage of their investment.

Therefore, whenever a company pays dividends on scheduled dates in the year, you can either a) transfer the dividend proceeds into your account or b) reinvest those dividends into more shares, thereby increasing the size of your position.

Traders who frequently seek dividends are looking for "passive" income because they don't have to do anything to earn dividend income.