If you’re looking to invest for your future, now is as good a time as ever to think about investing in stocks. However, it takes some preparation to make good investments, and investing money in the stock market may not be for everyone.
As with any type of investment, stock trading comes along with risks. When you consider the following tips regarding what to know about stocks before investing, you can mitigate some of these risks and increase your odds of making good returns.
7 Things To Consider Before Investing in Stocks
1. First of All, Look at Your Financial Situation
Before you invest any money, you need to take a close look at your current financial situation to make sure that you can actually afford to put some money into stocks.
According to financial experts, a good goal is to be able to save 10-15% of your annual income to invest. This should be in addition to an emergency fund of about 3-6 months worth of expenses that you keep in a high-yield savings account, which you can access in the event of any unforeseen emergency situation.
If you don’t have an emergency fund saved and you aren’t able to save more than 10% of your annual income for investing, it probably isn’t the right time for you to start investing in stocks just yet.
2. Consider How Much of a Risk You Are Willing To Take
If you have taken a look at your finances and decided that you have enough money to invest, the next thing to do is decide what your risk tolerance is. All stocks have some risk associated with them, but there are certain types of stocks that are higher or lower risk.
Naturally, the higher the risk you’re willing to take, the higher the potential returns are, but you could also lose everything. Lower risk stock investing typically doesn’t pay out big returns right away, but can provide strong long-term returns.
If your goal is to make money over the short-term, and you are OK with the possibility of losing some or all of your investment money, you might have a high risk tolerance. If you would rather minimize potential losses and earn money over the long-term for expenses far down the road, such as retirement, you likely have a low risk tolerance.
3. Consider a Few Asset Categories
Anyone telling you what to know about investing in stocks will surely mention something called diversification. This means that you build a portfolio of a variety of stocks in different asset categories, which helps protect against major losses.
When you have a well-diversified stock portfolio, certain stocks may go down in value at times, but others will go up. The idea is that the overall valuation of your portfolio always increases, even if assets in certain categories are not performing well at a given time.
4. Don’t Put All Your Eggs in One Basket
This is a golden rule of making good investments: never invest all your funds in a single asset. Doing so is the riskiest thing you can do because if that company or commodity hits rock bottom, you’re left with nothing.
It’s OK to put some of your investment money into high-risk stocks, but a good rule of thumb to follow is that you should never put more than about 20% of your total funds available into such assets. Depending on your risk tolerance, this percentage could be a little bit more or less.
5. Analyze the Company’s Past Track Record
Once you’re ready to start actually picking stocks to invest in, make sure you do thorough research about any company you’re considering before you actually buy stocks in it.
Look at analyses and research reports on financial investing sites and examine the performance charts for a stock’s performance over the past several months and years.
Also, perform a Google search with the company’s name and “news” to pull up any recent articles about the company. These could give you some insight into current events that may affect its stock market performance.
Third-party investment information sites also often have opinion articles written about companies that can help guide your investment decisions. For instance, if you want to invest in green energy, you could look up an article about the top sustainable energy companies to invest in right now, then do some independent research about those companies and their track records.
6. Have a Realistic Expected Return Timeframe
Investing money in the stock market is not a way to “get rich quick.” Sure, some people do, but they get extremely lucky, have years of experience investing in stocks, or are engaging in unethical and illegal practices, such as insider trading.
In general, there are two types of stock investments you can make: short-term and long-term investments.
Short-term investments are often intended to be liquidated in a year or less, or after you make a return of 10% or more on your initial investment.ё
Long-term investments can be held for a period of several years, and sometimes for as long as 30+ years.
Depending on your goals, you might decide to make short-term investments, long-term investments, or a mix of the two. For example, if you want to invest in stocks for supplemental income, short-term trading might be appealing, but you still need to understand that you aren’t generally going to make decent returns in just a few weeks or months.
On the other hand, if you’re saving for retirement or another big expense down the road, you might only invest in long-term investments, which you should only expect to pay out significantly in 5, 10, or more years.
7. Monitor Your Investments on a Regular Basis
After you pull the trigger and buy your first stocks, set a regular routine for monitoring them. You don’t have to check in on them every single day, but you should monitor them periodically to see how your portfolio is doing.
Long-term investments require less monitoring, while short-term investments require more, especially if you plan to sell them off when they hit a certain price threshold.
Tips To Avoid Stock Trading Scams
While the stock market is a legitimate way to make money, there are still scammers out there who abuse it and take advantage of new investors. Follow these tips to avoid stock trading scams:
Only invest through reputable stock trading platforms
Don’t trust unsolicited offers from stock brokers or investment advisors
Get a personal reference if you want to work with an asset manager
Don’t believe promises that sound too good to be true
Know that there is no such thing as guaranteed returns
Beware of high-pressure sales tactics
Watch out for social media ads related to stock investing
How a Chargeback Can Help You Recover From a Stock Trading Scam
In the unfortunate event that you have fallen victim to a stock market scam, you may still be able to get your money back through a chargeback.
A chargeback is a formal dispute process you can go through with your bank or card issuer to explain the situation, present the evidence, and hopefully get fraudulent charges on your credit or debit card reversed.
For the best chances of getting your money back, consider contracting the fund recovery specialists at a professional chargeback company. These experts know exactly how to navigate the world of chargebacks to get your money back.
If a chargeback doesn’t work, fund recovery specialists may be able to use other tactics to track down and pressure the scammers into returning some or all of your stolen funds.