Investing in stocks can be very profitable. However, it can also be a risky strategy as money can be lost as well as gained. If you are thinking about investing in the stock market, here are five things you need to know before you part with your money.
Your Level of Risk
Broadly speaking, there are three main levels of risk, high, medium, and low. Deciding how much risk you are willing to take will help you decide what stocks to invest in and develop a strategy that is right for you. High-risk will include volatile markets, start-ups and companies deemed to be risky. Taking a high level of risk may give you profits that are some of the highest in the world, but it could also be a fast way to go broke.
Low-risk stock will not give you the huge investment returns you might be looking for, but you are less likely to lose your money.
Many people opt for medium-risk investments so that there is a possibility of making a reasonable profit without taking too much risk.
The Past Doesn’t Indicate the Future
You may be considering investing in stocks that have been doing brilliantly recently but you should remember that the past doesn’t always indicate the future. Stock prices can go down as well as up which means that you could lose money, especially if you buy the stocks when they are high.
Do Your Research
It may be that someone you know has made a lot of money on the stock market and wants to help you to do the same. However, you still need to do your own research. It may be that they are happy to take more risks or use a different strategy than you are comfortable with. It could be that the stocks your friend has invested in are about to fall for some reason. Doing the research for yourself means that you can decide if you are happy to make the investment or not.
Don’t Invest More Than You Can Afford to Lose
Investing in the stock market may seem like a fantastic idea but you should never invest more than you can afford to lose. Most financial advisors will tell you that you should keep at least three months’ salary in an accessible bank account in case of emergencies. If you have money over and above this that you don’t need right now, then the stock market investment could be an excellent choice.
You are more likely to make money if you can leave your investment to grow over a longer period. Investing for a few years rather than months can often iron out any volatility in the stock market and leave you with a profit. Needing to withdraw your money over a very short term means that you are more at risk of market volatility, and you could lose money. Therefore, you shouldn’t invest money if you are likely to need it.
Be Open to Diversification
Don’t just stick to investing in one industry or type of stock. If these stocks drop in value, you could lose money. Spread your risk by investing in different industries and types of stock and although you may lose money on some of your stocks there is more likelihood of the rest of your stocks increasing in value. This should hopefully leave you in profit overall.
Investing in the stock market can be a brilliant way of saving for things such as college education, retirement, or a rainy day. However, there can be pitfalls. Read these five tips before investing to help you make some sound investment decisions.
