As everyone knows – the stock market is where people invest their money and become millionaires!
Right now, we could all do with some of that good fortune.
Of course, it’s not as easy as that.
But as the cost of living puts more pressure on your finances, you may be thinking seriously about investing in stocks as a way to make extra money.
Here are some vital questions to ask yourself before leaping into stock investments.
How does stock market investing work, and what are the key things to understand?
The first thing to understand is that investing in stocks always has an element of risk.
That’s because you make money only when the market moves up and your stock price, therefore, goes up, and you can sell that stock to make a profit.
Now, most people think that when the opposite happens and the market moves down, and your stock price goes down that it’s time to sell because you will lose your money.
That is what most people do. But that is not the right way to think about it.
The very important and fundamental thing to understand about investing in the stock market is that the market always goes up, always goes down, and always goes back up!
That is the way it works.
And you only ever lose money if you sell when the price has dropped. If you don’t sell, you are not losing anything.
Understanding this fundamental psychology will help you enormously.
In other words, you cannot go into investing and trading being afraid, being fearful.
It may seem scary at first, but that is why it’s wise to seek education and possibly even attend an investment course.
There are also some keywords to get familiar with, such as – asset class, market cap, liquidity, diversification, fear and greed, stock market indices, bid-ask, risk-reward, stop-order, and spread-betting, among others.
But don’t be put off. These are all very simple to understand with practice – it’s just wise to at least get a basic idea of what they mean because you will hear these terms a lot when investing and trading.
Why do I want to invest in the stock market?
As mentioned earlier, most people invest in the stock market to make money.
Fair enough. But it will help you a lot to delve a little deeper and ask yourself exactly why you want more money and what you want to do with it.
It helps to have a target. Because it focuses your mind on achieving that target.
As you will discover, the more you learn, having a strong mindset as quickly as possible will allow you to approach investing and trading with confidence.
Of course, it might not be just to generate more income for cash flow that is your motivation. Maybe you want to make more money for your retirement or as a deposit for a house.
At the time of writing, and with banks and building societies withdrawing mortgages, investing to make money for a deposit might be your only way to get that deposit money together.
So what kind of returns can you expect to make through investing and trading?
On average, it is 10% a year. That may not sound much and it certainly would not be if you only invested in ONE stock.
So the trick is to invest in many and across different companies and industries and things like gold and silver and oil.
These are what are known as “assets.”
The thing with setting a clear goal is it will help manage your risks, and overall support you in becoming a profitable investor.
What am I willing to risk?
It is important to take the risk seriously. A golden rule is – only risk what you can afford.
The last thing you want to happen is to find yourself in financial trouble because you have risked too much.
That is why it is vital to allocate a set amount for your investment.
Again, this is about being disciplined and sticking to a good investment plan.
Investment risk varies.
With a savings account, the risk is virtually zero because interest rates are so low – sometimes as little as 0.2%. You simply are not going to lose very much… but neither will you make very much.
And when inflation outstrips savings rates, a savings account is pretty useless… and probably why you are looking to invest and trade.
On the other hand, there are high-risk investments available that can make you more money and more quickly – but you must understand what those sorts of plans or schemes are because they can be complex and tricky to comprehend properly.
Can I know where my money is being invested?
Yes, you can. But do you know anything about that particular company or niche?
It’s very easy in today’s stock market to buy shares in many household names and even big banks themselves.
For instance, for most of 2022, you could buy shares on Facebook, Amazon, PayPal, Johnson & Johnson, Caterpillar, Medifast, and even Goldman Sachs, among many others.
You could buy their stocks because their prices came crashing down making them very affordable for the ordinary person.
Wise investors didn’t hesitate. Why? Because these types of companies are very unlikely to go bankrupt. Therefore, you are highly unlikely to lose your investment.
And because these companies are highly likely to recover (remember the market goes up, down, up) then the value of the stock you own with any of them is going to go up.
That’s when you sell and make your profit as any investing course will tell you.
Do that over many household names, and, well, your chances of meeting your overall investment target are looking good.
Investing in the stock market is a great vehicle for achieving financial targets and needs.
But you must ask yourself these basic questions before making a start, as they will help you start right.