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Before investing in the stock market, it’s critical to determine a few things. Whether you’re buying your first shares or tenth, the process is the same. You need to plan and do your homework.
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Planning creates a better investment strategy for getting more out of market movements. It also minimizes potential risks and maximizes potential gains. If you’re thinking about investing in the stock market, it’s essential to ask yourself seven questions before buying any stocks.
But before I discuss the seven questions, check out my example of what not to do.
My Stock Picking Story (Don’t Do This!)
When I was in college, I discovered a website where you could buy fractional shares of stock. Every day I would search the site for potential stocks at prices a college student could afford.
At the time, all I knew about investing in stocks was buy low and sell high. So, when I heard KMART filed bankruptcy and was going for pennies on the dollar, I dived into stock picking.
Because of that, I ended up the proud owner of 20 shares of KMART stock.
But here’s where I went wrong. I didn’t do any research on KMART. I assumed bankruptcy was a move to help the company shift debt. I wrongly thought they’d bounce back stronger.
Unfortunately, my fractional shares did not amount to big wins. In fact, the website eventually stopped allowing investors to buy the stock.
And ever since then, I have invested in mutual funds and index funds. I thought less headache, less risk. But now I know how to make better investment decisions and pick stocks.
Investing in the stock market is a great way to build wealth. However, knowing what stocks to pick or skip can be nerve-racking and overwhelming. Use these seven questions to help you create your investing plan. Then, pick stocks that are best for your investment portfolio.
1: What Are Your Investment Goals?
There are tons of ways to build wealth. You can invest in real estate, start a business, or save and invest in your employer’s retirement account. Regardless of your investment vehicle, it’s essential to set an investment goal.
Most people choose to invest in the stock market rather than real estate, a business, or alternative investments like cryptocurrency for the projected returns.
On average, stocks tend to have a 10 percent return each year. Some years an investor may see better returns, but each year may vary. In comparison, other investment options have not had the consistent performance of the stock market for several years in a row.
Before investing in the stock market, ask yourself how much you want to make and why. For most people, if you’re investing for retirement, your goal may be to accumulate enough money to retire comfortably. Others may want to earn enough from investing to pay for college or secure a down payment for a home.
My advice is to set a goal. Write down your goals and put them in a place where you can see them often. Also, be clear about why you’re investing. Your motivation for making money in the stock market is just as important as your goal.
Setting clear goals will help you manage your risks. But your why will motivate you to stick to your investment plan even when the market has a bad day.
2: What is Your Budget for Investing?
Beginner investors must set a budget for investing. Decide how much you can afford to invest and never spend money you can’t afford to lose. For example, never invest your rent or mortgage payment and expect to cash out before the bill is due. That, my friend, is called gambling.
To know how much you can afford to invest, you have to know your monthly income and expenses. As long as you make more money than you spend, you can dedicate a portion of your income to investing in the stock market.
Before investing in the stock market, make sure you have at least $1,000 set aside for an emergency. Your emergency fund should be at least three to six months of your monthly expenses. However, depending on your lifestyle and location, it could take a while to save six months’ worth of money saved.
Therefore, I recommend you start with saving at least $1,000. Then add to your emergency fund each paycheck until you have six months of expenses saved.
If you have at least $1,000 in your emergency fund, then it’s time to invest. Allocate money from each paycheck towards investing. Also, remember to include the money you intend to invest in your budget.
Including investing in your budget will help you invest more consistently. Remember, you can always increase what you invest. So, start small and increase after seeing how your new budget with investing included works for you.
3: Where Are You Going to Invest?
Today there are multiple ways to buy stocks. You can purchase stocks on apps like Stash and Robinhood or seek the help of a stockbroker or financial advisor. Many investment firms such as TD Ameritrade, Vanguard, or Fidelity will also help you invest in the stock market.
Whatever platform you decide on, make sure to do your research. You should know what fees are involved with each purchase or sale of stock. Don’t be afraid to ask questions. You have a right to see the cost of doing business with the company you choose.
Then, you’ll need to open a brokerage account. A brokerage account allows you to purchase investments like stocks, bonds, and mutual funds.
I enjoy having the ability to see my stocks’ performance on my phone, so you could go with a company that also has a mobile app. Although, I don’t recommend you stress yourself looking at your investment portfolio daily.
Lastly, I recommend that beginner investors go with a company that provides educational articles. It’s helpful to learn while you earn money in the stock market.
4: What is Your Time Frame for Investing?
How soon you want to access your investment earnings is a critical question beginner investors must ask themselves. For one, cashing out stocks sooner than a year after purchasing them can have serious tax consequences.
On the other hand, when you own a stock longer than a year, the tax rate on your gains is lower. Taxes are paid on a stock’s gains after you sell the stock.
If you believe you’ll need the money you’re investing in the stock market in the next few months, put your money into a high yield savings account instead. You might not make the average ten percent return on your money, but it will be easier to access. High yield savings accounts earn interest, but it’s much lower than stock market returns.
But look at the upside. You can’t lose money put in a high yield savings account. Money invested in the stock market can increase or decrease in value due to fluctuations in the stock market. However, money in savings accounts is not invested, doesn’t lose value, and is insured.
On the other hand, everyone knows you cannot save your way to wealth. Due to the low return on savings accounts, it’s much more beneficial to invest in the stock market despite the risks.
For the best results, I think you should invest for the long term. Investing with a longer time horizon allows you to deal with stock market fluctuations and wait for the market to rebound if you experience drops in stock values.
Personally, I’m investing for the long haul. Any stock I pick I plan to keep for at least five years. My long-term investment timeline allows me to stress less. When the market suddenly drops, I don’t worry because I know the stock market will have a chance to correct itself or go back up.
Short-term investing is not a bad thing. You have to be prepared mentally and financially for the risks. Short-term investors may hold onto a stock for a few hours, months, or days. However, they must understand the risks and tax implications.
Day trading can be stressful, and I only recommend it if you know what you’re doing. Many of the most successful day traders have taken several trading courses. In addition, day traders may have experienced days of great gains and periods of significant losses.
5: How Frequently Do You Want to Invest?
Although you could invest any time you have extra money, I recommend starting with a schedule. Establishing a new habit is more effective when you create a pattern around the action. For example, you could invest each paycheck or on the same date each month.
You also have the option to save up cash in your brokerage account and then buy shares when a stock you’re watching dips in price. Or you could purchase stocks quarterly.
I prefer to invest monthly.
For one, investing each month can be more affordable for your budget. Beginner investors can also see better returns by investing monthly, thanks to dollar-cost averaging.
Check out the Motley Fool’s Stock Advisor here.
Let’s say you have $6,000 to invest. You could spend all of your money to buy stocks in January. Or you could buy shares of stock for $500 a month. By the end of the year, you’d still spend $6,000. However, how many shares you could purchase would’ve varied each month.
Just like clothing goes on sale at retail stores, stocks go on sale. So by spending your money throughout the year, some months you’ll get stocks at their lowest prices, and other months you’ll pay a little more. On average, when you invest according to dollar-cost averaging, you lower the cost paid for stocks and better manage your risks.
6: What is Your Risk Tolerance?
Investing in the stock market is not for the faint at heart. Some days the stock market will drop to record lows, and other days it will reach historic highs. Therefore, beginner investors should understand how much risk they want to take and invest accordingly. Understanding the level of risk you’re willing to take will determine your risk tolerance.
Aggressive investors have a higher risk tolerance and may invest in riskier stocks for the potential of higher returns. At the same time, moderate or conservative investors will take fewer risks and choose less volatile stocks.
7: How Are You Going to Pick Your First Stocks?
Google is a great search engine, but there is a lot of information on the internet. Some of it’s credible, and some of it’s questionable. So how do you know what to believe?
Remember, buying a stock is buying a slice of ownership in a company. Therefore, beginner investors must do their research before buying a stock. Take into consideration what the company makes or does, review the past and current stock prices, and read the latest news.
You can check out various websites like Yahoo Finance or Morning Star. Then use the information you find to make informed decisions about what stocks to buy. Some will even watch stocks for months or weeks before buying one share.
I don’t have the time to research and read all the companies’ earnings reports. So, I started to ask around to see if there was an easier way to invest.
Investing In Stocks with Motley Fool’s Stock Advisor
Recently, a good friend told me about The Motley Fool’s Stock Advisor. As a member, I get monthly stock picks and access to reports that explain the pros and cons of investing in that company.
Finally, I can pick stocks with ease and less anxiety.
I can spend as much time as I like researching stocks. Or I can catch the highlights in the stock pick emails. As a member, I also get access to past reports on stocks. It’s sometimes nice to see a company’s progression and how well the stocks have performed.
The best part is Motley Fool has a long-term investment strategy. So, what they recommend aligns with my investment timeline.
If I had one complaint, it would be the number of emails. I enjoy reading Motley Fool emails because they’re funny. But I do get a lot.
Takeaways
But before you dive into investing in the stock market, take the time to ask yourself these questions. Then, write out an investment plan, and then go for it. Remember, start small and work your way up.
I want you to start investing so your wealth journey can get the boost it needs.
Lastly, the interest earned in a savings account doesn’t compare to what you could make in the stock market. Therefore, it’s worth investing, but don’t forget to save for your short-term goals and emergencies.