We all hear the same thing from the media: investing is an excellent way to grow your wealth. We celebrate investors and risk takers. Forbes regularly updates their list of investors who make billions from investing in the right companies.
However, even these successful investors are wary when it comes to stocks. Sure, the long-term return can be substantial. But stocks are its own asset class with its own set of risks.
For this, you need to have a healthy risk appetite i.e. you must be fine with losing some money before earning a positive return.
You must also educate yourself on stocks in order to formulate an investment strategy. This is extremely crucial for success. Your investment strategy must meet your investment goals.
Have a read of our beginner stock investing tips below, and you might even find that stocks aren’t what’s going to help you achieve your financial objectives right now. Read on!
Set Your Goal
Before investing, you have to answer essential questions such as: 1) WHY you are investing and 2) HOW LONG you are investing for because knowing these will help you determine your financial goals.
New investors get so excited about putting their money in the market that they never plan out their objectives. This crucial step will be a “north star” that will guide your investment decisions. Then you have to compare that goal with with the nature of stock investing.
For example, if your goals is to have a lump sum available in 2 years, you shouldn’t be looking into stock investing to meet that goal.
Since the stock market fluctuates and does not guarantee capital availability in that short amount of time, you will most likely need another stream of income or a safer investment.
On the other hand, the stock market is great for long-term goals like saving up for your child’s college funds, retirement, or a new house. This is because the stock market on the whole tends to increase in value.
Identify and Learn about the Risks
Depending on what your investing strategy is, you will need to educate yourself about risks in the stock market. There are two main sources of risk in stock market trading: systematic and unsystematic risk.
Systematic risk refers to risk inherent in the stock market as a whole. Just as a rising tide lifts all boats, certain factors affect the entire stock market. Interest rates and economic cycles are a couple of sources of systematic risk. The key takeaway here is that you cannot mitigate systematic risk by diversifying your stock portfolio. You can however, diversify your portfolio with other asset classes.
Unsystematic risk refers to company-specific risk. These risks arise from the unique characteristics of each company. Sources of unsystematic risk might be the company’s business model, which demographics they serve etc. It is simply impossible to give any blanket examples of unsystematic risk because they’re different for every company.
Now, just having these definitions in mind can greatly change your approach to analyzing stock investments. For example, if you feel that a particular company has great prospects in the near term, it might not mean that it’s a great time to invest in the company’s stock. Market risk might expose the investment to negative influences right now.
How to add stock investing to your budget
Budgeting is the bedrock for sound financial decision-making. And predicting income is one-half of your plan. If you’re looking to invest in stocks to generate income, then you need to be wary of the volatile nature of stock market investing.
As we mentioned earlier, the stock market rises and falls frequently in the near term. It would be foolhardy to predict how much you could earn in the next 1, 2 or even 5 years from stock investing. Stock investing should not be used as an income source to cover near term expenses.
Where stock investing has its place, is in funding lump sum expenses far into the future.
The stock market has always gained value over the long term, and it is expected to do so going forward. Therefore, you could more confidently predict what you might be able to earn 20 years down the road.
So here’s our advice: allocate a portion of your income towards investing. This could even be a separate bank account. Then, invest solely from that account. Any returns from your stock investments should not be touched in the near term until your lump sum expense (e.g. kids’ college fees) becomes due.
When it comes to increasing your money, investing offers significant growth. All you need to do is study the market, consider your options, and evaluate your current financial standing. Read more about how to invest in stock market and be financially prepared for your future.