The “7 Tips Before Investing in the Stock Market” post was created to provide investors some insights as to what they need to do before investing. Investing can be risky and, at the same time, rewarding. This post contains affiliate links/ads. See disclosure policy.
Have you thought about investing in the stock market? Do you know what you can do to start doing it?
The decision to place your money somewhere is a critical decision that shouldn’t be taken lightly or in a whim.
One wrong move after the other may mean a not-so bright future for you. On the other hand, a small step can bring light to and better chances of you having the future you dream of.
While it is easy to get bombarded and confused by media and its never ending injection of both informative and senseless data, you should stay calm and don’t make decisions without careful planning and analysis.
Over the years, I have learned so much about the stock market and investing. In my own little ways, I found my recipe to be successful in investing.
Let’s call this post investing in stocks 101.
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7+ Tips Before Investing in the Stock Market
According to Fool.com, success in investing is not based on monitoring the market but analyzing the companies’ strengths and weaknesses. Here are 7 tips before investing in the stock market that you need to consider:
1. Know your timeline (i.e. time associated with goals).
Time can be your biggest ally or your worst enemy.
Depending on when you will need the money will mostly determine what investment strategy you should take. Short-term goals are goals hoped to be to be achieved within 3 to 5 years and it is best to take a conservative investment position.
Conservative investments tend to carry lower risks compared to aggressive investments but they do produce low returns, well, for most of the time.
On the other hand, long-term goals are goals that are hoped to be achieved after at least 5 years and tend to lean towards higher-risk investments, which historically provide higher returns.
2. Test the water (i.e. start with small amounts).
I know how it feels to put your hard earned money in the hands of the stock market. My wife and I have been there. It was the scariest feeling in the world.
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Now, my investment is around $900. That’s 12.5% return in 5 months. That’s a big return. Banks pay 0.01% per year.
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3. Be cognizant of the investment fees.
Never overlook at the investment fees. They are money sucker.
According to Morningstar Research, the average expense charged by ETFs and mutual funds is 0.61%. Looks not alarming, but wait until you calculate expense for the next 20 years.
If you have $100,000 invested, you would be paying $690. If that $690/year is invested instead at 15% compounded annually for 20 years, the result would be $73,681.15.
Imagine if you have $150K, $200K, or more invested. In reality, some firms charge 2%. That’s a lot of money.
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4. Know when to invest (i.e. time associated with when to use money).
One of the best tips before investing is knowing when to invest.
Time also refers as to when one invests in the stock market. Do you invest all your money at one time when the market is down? How do you know when the market has bottomed?
Do you apply the “dollar cost averaging”, which can protect you from the risks associated with investing your money at one time?
The practice of dollar cost averaging is essential especially during a volatile market. By applying this strategy, you are reducing your risks by making consistent investments each time over a period of time.
This will likely help you buy more shares for the same amount of money when the market is down, which won’t happen if you invest all of your money at one time (i.e. when the share prices are high).
5. Have a plan.
Another one of the best tips before investing is having a financial plan. Before making any investment decisions, it is always a must to have a financial plan in place. This plan can help you further understand your financial situation.
According to sec.gov, the first step to take for a successfully investment is to figure out your goals and risk tolerance. Your plan doesn’t have to very elaborate but it needs important information such as your risk tolerance, short and long-term goals, investment strategies, etc.
Having a plan allows you to check and manage your progress and make adjustments, when necessary, to your investments to ensure you are aligned with your goals.
6. Have a purpose.
Investing in the stock market should come with a purpose.
For every decision you make especially an investment decision, there should be a purpose attached to it. Whether you want to invest because you want to save for your future or to buy a car 3-5 years from now, it is always an important practice to define your purpose for making investments.
The purpose will be key to what investment strategies (i.e. conservative, risky, or mixed) you likely should to consider. It will also help you decide whether to invest in one sector within the stock market or consider a mix of investments.
7. Be knowledgeable on investments.
Your investment knowledge will have a great impact in your decision as to which investments to consider and which ones to stay away from. The more knowledgeable you are with investments, the better you are in making sound investment decisions.
A better-informed investor will be more knowledgeable about other investment instruments such as options, hedge funds, derivatives, mutual funds, among others and may reduce the chance of making bad investments. This may not be true with novice investors.
The more you understand about the products within the stock market, the better your chance in succeeding in investing in the stock market.
8. Define your risk tolerance.
One of the most important factors to consider before investing or tips before investing is risk tolerance. Risk is uncertainty that can negatively affect investments returns. All investments do carry risks and they exist throughout the life of the stock or fund.
Risks can be low risk, high risk, or somewhere in between. In investing, you can lose money or earn money. It is in your best interest to identify your risk tolerance. If your risk is low, then, investments like term deposits and bank deposits best fit you.
If your risk is high, then, investments like stocks and bonds may be some of the options that you can invest on.
Some investors don’t like losing money and prefer to stick with investments with low risk, typically those covered by the Federal Deposit Insurance Corporation (FDIC). Though this may be sound and safe, there is an innate risk associated with such choice since inflation tends to rise faster than the return in bank instruments.
On the other hand, those who take greater risks have better chances of getting higher returns. According to FINRA, the level of risk typically correlates with the level of return that an investment may achieve.
Do you ever wonder why banks pay dismal interests in your accounts while investments tied to the stock market tend to achieve higher returns or loss value? The answer is because of the risks involved with either putting the money in the bank or investing the money in the stock market.
9. Find better use of resources.
A lot of people want to invest in the stock market to make their money grow. But another important consideration to be aware of is whether your money can be better used somewhere else.
When deciding to invest in the stock market, it is in the best interest of the investors to ask if they are better off investing their money in the stock market or address issues that involve using money like credit card debts, emergency funds replenishment, among others.
It goes to say that, at times, there are certain activities that make more practical and financial sense that putting resources towards investments.
For example, you have $10,000 that you consider putting up for investment; however, you also have $10,000 in credit card debts with an average APR of 15%. As an investor, you should consider if it’s best to pay off the debt or invest the money.
In a perfect world, the answer is to invest the money if the investment produces at least 15% every year plus some interest to cover for tax liabilities. But if it’s not the case, then, it’s better to pay those debts off.
It’s always a good strategy to think things over before making any decisions. This is applicable especially to investing. You don’t want to start investing just because you see the market is down and have opportunity to buy more.
Careful thinking, thorough analysis, and proper management are necessary to ensure that you are fully aware of the consequences (good and bad) of investing. Remember that even a small bad investment can make a big difference to and for your financial future. Next time you consider making investments, please think of these 7 tips before investing in the stock market.