8 Things You Should Know Before You Put Money In The Stock Market
The stock market, for many, is a mystical creature. You’re not sure how people make money “buying low and selling high” (you ask: “Is it really that simple?”) and aside from that, the only thing you really know about it is that a 1987 movie mentioned something about greed being good in the market.
To put it simply, investing is one of the best ways to make your cash grow. Unfortunately, it can also be the cause of your financial downfall. So, before you even think of opening up an account with COL or any of the brokerage firms, here are some things you need to know and consider in order to invest wisely.
8. It’s not as easy as it sounds
Don’t be fooled by people who tell you how much they’ve earned “playing” the market—it’s not that easy. If it were, everyone would be rich. A lot of the chatter espousing the ease or fun of playing the market comes from people who don’t know what they’re doing. Now if you don’t know what you’re doing, you’re making money off luck, not skill. And in the long run, the chances of getting burned in the market are higher if you’re just running on chance.
7. But you don’t have to be a rocket scientist to pull it off
As long as you know what you are doing—e.g. you have your own set of investing rules in place, you stay disciplined, and most importantly (and this is where a lot of people have trouble) you don’t get emotional—you will do well. As investor Warren Buffett said, “Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
6. Be financially and emotionally prepared to lose money.
One of the most important rules in investing is to not lose money. Easier said than done though, with even the investing greats still making mistakes despite their experience and knowledge. So, get ready to make errors that result to losses, and figure out how to handle these kinds of mistakes so you don’t compound them with more mistakes. Provided you learn from your investing errors—and assuming you don’t lose all your money—losses are almost a certainty but they’re normal.
5. Money you put in the market shouldn’t be money you might need in the next three years
With #6 in mind, it’s a good idea to only use your spare money for investing, money that you don’t need to use for necessary expenses in the near future. Other things to take care of before you start investing include 1) first having an emergency fund of at least three months’ total personal expenses, but ideally at least six months, and 2) paying off any credit card debt as it’s highly unlikely you’ll earn returns on the market that’ll offset the high interest rates you’re paying for said debt.
4. Have a personal financial plan
Before you start figuring out what kind of investing you want to do, you need to know what your goals are and how much risk you’re willing to take. Age matters in this regard; younger people have a longer time horizon for investing and can therefore take on more risk, while older people who are thinking more about retirement should settle on the less risky investing styles.
Aside from that, you should also know how much money you can and should be able to set aside for investing. This involves having a good savings and budget plan and sticking to it. (Pro tip: there’s a savings calculator at the NYTimes site that shows you different saving scenarios.)
3. Active vs. Passive Investing
How much free time you have also determines what kind of investing you should be doing. If you can put in time into really studying investing, it’s best to do your own stock-picking. Otherwise, you can have a fund that does your investing for you. You can choose between an actively-managed fund or go the passive route by choosing a low-cost mutual fund or index fund.
When choosing a fund, make sure you come to an informed decision: you should know how the fund you chose invests, and how much their fees cost overall.
2. Fundamental Analysis or Technical Analysis?
There are plenty of different ways to make money in the stock market. You should have a basic understanding of the most common types of investing before you can decide which one suits you best. It should be one that makes the most sense to you, and the one with a tolerable risk level based on your personality and investing goals.
Start by understanding the rationale behind the more popular investing styles such as value investing and technical analysis, and then go from there. Reading about how the best investors made their money can also help you pinpoint which style you want to emulate or base your own style from. Try Investopedia.com, this site with many easily understandable explanations about the basics of investing.
1. Be wary
In a local stock market rife with insider trading and stock tips, it’s easy to get caught up with the recommendations that reach us. The best way to make sure you don’t lose your shirt is by doing your own work. Take advice with a grain of salt (i.e. read research reports but focus on the facts and not the opinions), and remember that if it seems too good to be true, it probably is. There are many ways to get scammed; make sure you don’t become a victim.