We’ve all heard a stock market success story from a friend or acquaintance. “It was the easiest money I ever made,” they say. “I doubled up just by watching the trends for a few weeks.” This type of story leaves the ambitious feeling anxious. You may think, “Hey, I’m smarter than that guy. Maybe I should invest in the stock market.” While it’s true that you may be your friend’s intellectual superior, your perspective is a little short-sighted. Intelligence plays only one role in a complicated trading system. Consider the following factors before making any decisions, and don’t invest in the stock market unless you:
1. Understand it. Playing a game you don’t understand is a great way to wind up in the loser’s circle. Consider the following example:
Marco is interested in buying Netflix stock. The share price has hovered around $400 for the past few months and he thinks it will continue to hold steady. Marco buys 15 shares on January 28, an investment totaling $6,090. When the stock price dips slightly on the 29th, Marco panics and decides to sell. Unfortunately, Marco’s premature decision cost him. The stock price continued to climb, closing at $409 on January 31, resulting in a net loss.
The moral: Know the rules before you play the game. Stocks rise and fall on a regular basis. Knee-jerk reactions are based on emotion, and therefore, are rarely useful.
2. Don’t need the money. Stock trading comes with an inherent level of risk, something you should avoid if money is tight. A get-rich-quick scheme is rare and you shouldn’t play the stock market like a slot machine. If you are interested in investing, set aside funds that you won’t miss if you happen to lose them. Do some research surrounding specific stock trends and invest carefully. Consider speaking with a financial planner before going forward as well. The bottom line: If you can’t bear to lose the cash, don’t. Place it in an investment vehicle with lower risk.
3.Have an end-game in mind. Why the stock market? Are you trying to learn about trading in general or do you have a purpose for your investment? Goals are important in the world of investing. Have a clear one in mind before proceeding.
4. Have other options. Individual stocks are one of many investment choices. For example, mutual funds are a managed collection of investments that pools money in stocks, bonds, money markets and other securities. They utilize stocks that match your risk tolerance in order to provide a deliberate rate of return. This is just one example of how stocks are used in blended investments. Talk to a financial planner about the many options at your disposal. He may suggest another avenue that can work toward your goals.
5.Have control of your credit. Risk is the antithesis of credit repair. Debt reduction and liquid savings are imperative to credit health, two things that are difficult when your cash is tied up in the stock market. Examine your financial situation before taking the plunge. Do you have high credit card balances or student loans? Is your credit utilization where it should be? If you broke your leg tomorrow, would you have the savings to tide you over during recovery? Don’t discount these risks before trying your luck in stocks. Take care of the important things first. The NASDAQ isn’t going anywhere.