Investing in stocks can be a very profitable thing if you do it the right way, but it isn’t for the faint of heart, and it isn’t for those who don’t know what they are doing. Before you start committing your capital to stocks take into consideration the following points.
5 things to do before investing in stocks:
- Understand your personal financial situation – This is paramount in having success in the market. Never overstep your financial boundaries or you are on the path to failure in a hurry. You need to take accountability for understanding what types of investments you can and can’t handle, and fully understand that before investing your money. Don’t count on a financial planner to understand this for you.
- Understand diversification – If you don’t understand the word diversification and how it relates to an investment portfolio then you certainly aren’t ready to invest in stocks. Diversifying your portfolio is an absolute must, no matter what kind of stock market environment we are in at the time. Those who aren’t diversified are those who suffer the most in a terrible bear market.
- Select the right portfolio holder for you – This is where you must decide whether it is wise for you to be investing in stocks on your own or if you should be paying a financial planner to invest for you. Assuming you want to invest on your own you still need to figure out which stock broker to invest your money with based on your needs. Some brokers offer much more research and full services, while others offer much cheaper commissions. You need to decide which you fits your situation the best.
- Do all the research necessary – This is the step where you have to actually put your nose to the grindstone and decide which companies have the most solid financial outlook and the best valuation. Don’t rely on any single stock picker to do things for you, rather consider advice from the smartest on Wall Street and then research each and every pick yourself.
- Realize that it will be a bumpy ride – I don’t need to tell anyone who has seen the market in the last 18 months that the stock market can fall quickly and crush a lot of dreams quickly. Do not invest more than you can afford to lose and do not make emotional investment decisions. Before investing you need to have a reasonable outlook and know that nothing at all is guaranteed in the stock market.
The bottom line is you need to be prepared before you make that first investment in a stock of any kind. Take the responsibility upon yourself to be ready for whatever may be thrown your way. There is no free lunch in investing in the stock market, but some good old fashioned preparation can go a long ways towards making it a profitable experience.
Aaron K. Smith is a freelance writer with experience working in the mutual fund industry and writing about investing and the stock market.
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