Updated Oct. 5, 2021, 10:50 p.m.
If you are curious about investing in the stock market, you might be wondering where to even begin. Well, there are a few things to first consider before participating as an investor.
Having success as an investor requires financial discipline, as well as having realistic goals and expectations. Review the items from this checklist to see how prepared you are for investing.
If you really want to maximize the growth of your money, the first prerequisite is having an income. An income would allow you to make regular contributions towards investing. Though you may still invest with only an initial deposit, the real payoff manifests through consistency.
You will need to get your finances in order and obtain a consistent stream of savings from your overall income. This calls for identifying unnecessary spending and budgeting to boost the amount of money saved. Read about how to reduce your discretionary spending in this article.
How much you are able to invest ultimately depends on what is left over from your income after your expenditures. Generally, the goal is to invest at least 10% of your income if you begin as a young adult, and a greater amount if you start later in life. You don’t have to put your life on hold to reach this; simply save a reasonable amount of money and invest within your comfort zone.
The stock market is a system designed for people who want to participate in and grow with the economy. It should not be thought of as a lottery where you bet on company stock in hopes of a fast-track ticket to riches.
Some investors may have the foresight to capitalize on a booming business ahead of time, earning greater rewards. Don’t expect to get rich quickly like this, especially if you are making uninformed decisions. Know your risk and educate yourself. Don't risk more than you are comfortable with losing, because you can lose a majority of your life savings with a reckless investing style. Understand that you are responsible for your wins and losses by participating, no matter how the stock market performs.
Since investing is a way for people to generate additional income, it is subject to taxes. Be ready to owe the government a portion of your net profits. The amount you owe is usually taxed at the same rate as your regular income tax bracket, but it could be less when cashing out your long term investments held over a year.
Do you wish to actively manage your growth or be hands-off? You may speak to a professional financial advisor to pick and manage your investments if you prefer a more passive approach. Identify your risk tolerance and be prepared to do your own research to manage your risk.
Will you invest aggressively towards high growth potential or allocate your assets conservatively for wealth preservation? Seeking growth above all comes at the cost of stability, so keep in mind that you get both increased risk and reward.
Decide if your investing goals are long term or short term. Long term investing goals are typically greater than five years, such as retirement. Be aware that investments held under a year are subject to higher taxes and your money experiences greater volatility in the short term. For this reason, we recommend you begin investing with long term goals in mind.
Time is on your side as short term fluctuations disappear and the overall trend is revealed. Think “slow and steady wins the race” when you make a long term commitment into secure investments. Remember that as a long term investor, you aim to preserve your wealth and have steady, modest returns that grow in the long run.
With all things considered, you should decide which kind of investment account you would like to open and who will provide your services.
Long term investment goals align perfectly with retirement accounts by design because they are tax advantaged if funds are not withdrawn before you reach retirement age. Often, people invest indirectly through employer sponsored plans such as a 401(k), but not everyone has this provided as an option. You may also choose to invest within a traditional, SEP, or Roth IRA.
For both control and ease in managing your own IRA, look into opening an account with M1 Finance. They require a $500 minimum but otherwise have no fees. You may actively select what goes into your portfolio including fractional shares of stocks and ETFs, or you can allow their robo-advisor invest for you.
As for taxable account options, you may purchase bonds from the treasury, or sign up for a brokerage account to invest into stocks. A good place to start and gain experience is to invest in the stock market yourself. There are many online brokerages and apps that are simple to use and commission free, with no account minimum required.
Among a list of many investing platforms, I personally use two apps: Robinhood and Webull. If you would like to earn free stocks as part of their new account promotion (and as a way to support my work) you may use my referrals linked above, but first try asking your friends who might invest.
Robinhood is a popular option due to its simplicity, but we would advise investors to do their own research before purchasing each stock. They offer trading in stocks, fractional shares, options, ETFs, and even some cryptocurrency. A detailed guide for investing with Robinhood is available on their website to walk you through the process.
Since you shouldn’t blindly invest into stocks, read ahead on how to reduce risk and avoid common mistakes new investors make.
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