5 Essential Things You Should Know Before Investing in the Stock Market

Source: https://www.pexels.com/photo/businesswoman-in-white-shirt-using-her-laptop-7681683/

Stocks can be a very lucrative asset. For nearly a century, good growth stock mutual funds have averaged a ten to twelve percent annual rate of return. If you’re considering investing in the stock market, your chances of making money are pretty good if you invest the right way. But you could also lose money.

As a potential investor, you should remember to never invest money you can’t afford to lose. Thankfully, the stock market and real estate are two valuable assets to include in your investment portfolio and lower your risk of losing money. But just like real estate, you have to decide which stock market investment strategy is best for you.

Some investors trade in and out of the market daily to earn an immediate income. Other investors choose to buy and hold stocks for an extended period and make money over time. No matter what investment strategy you choose, here are five essential things you should know before you get started. 

Research is Necessary 

Some people romanticize owning stocks as if there’s a magic call you make to generate thousands of dollars a day from buying and then selling stock shares. In reality, there’s a good bit of research and analytics involved in buying and selling stocks. There are many good resources to help you navigate the stock exchange. But you should also know what you’re investing in and why.

Most wise investors try to buy shares in solid, healthy companies with a good track record. You can research the health of the companies you’re interested in using historical data. Once you’ve researched companies or mutual funds, you should decide on a broker.

You can choose a full-service or an online broker, which will require more research. Brokers earn a commission when investors buy and sell stocks. Like companies, you should research broker reputations and track records before you select one. But even if you select the number one broker in the industry, you should never blindly invest by completely relying on them to manage your investments. You should be aware of what you’re invested in and stay informed while considering the advice of professionals. 

Diversify

There are many ways to diversify investments within your portfolio. It’s common knowledge that you shouldn’t put all your eggs in one basket, but you should even have more than eggs in the basket. Diversification is important because it reduces risk. It’s better to lose fifteen percent of your money than one hundred percent.

You can diversify by investment type, like stocks, bonds, and real estate. But you can also diversify within these investment types. You have several options within the stock exchange including but not limited to: 

  • growth stocks,
  • value stocks,
  • foreign or international stocks,
  • and defensive stocks

To get the most from your investments and lower your risk, you should have a mix of different types of stock in your portfolio. Growth stocks generally outperform other company stocks. They have a good track record, and most put their profits back into the company for faster growth. Value stocks are usually your cheaper stocks. Foreign stocks increase diversification because you can invest in separate markets that respond differently.

Defensive stocks also mitigate risk because they include shares in companies that supply basic necessities, so they are more reliable. Once you’re familiar with the different types of stocks, you can make informed decisions about your investments. 

The Right Time to Buy and Sell

Always buy and sell stock based on data, not emotion. The thrill of watching the balance in your brokerage account increase could lead you to make emotional decisions. For instance, once you learn to read stock charts and use a stock forecast you will use this information to determine when to buy and sell.

It can also be hard to see a significant decrease in your balance and not sell, even though the data says you should hold it longer. The most common way investors lose money is they buy and sell at the wrong time. Remember to start with data, stay with logic, and leave emotions behind when choosing when to buy and sell. 

No Company is Perfect

There are no companies that have a perfect upward trend with no dips on the charts. Some company stocks are more volatile than others, which is why analysts are necessary. They analyze data based on upward and downward trends for different companies in the exchange.

If you start investing in individual companies with the idea that the price will never go down, you’re more likely to make an emotional decision to sell too early. You have to be ready to ride the waves and trust your decision based on data and research. 

Be Aware of Tax Implications

You should know your potential tax implications before you open a brokerage account. In the US, once you sell stock or start earning dividends, you have to pay taxes on your capital gains. The capital gain is the profit you earn from selling the stock.

You will owe fewer taxes if you buy and hold stocks for more than a year. If you choose to trade in and out of stocks for income, you can apply for trader status with the Internal Revenue Service and offset your gains with your losses. Be sure to research tax implications in your country before you start buying and selling stocks. 

Final Thoughts 

The stock market can be a great asset to your investment portfolio. If you choose to invest in the market, you should get educated and do plenty of research before opening a brokerage account. You should also diversify within the stock market and avoid investing in a single “perfect” company.

Use data and research, not emotions, to know when to buy and sell stocks. You should also be aware of the tax implications in your country so you’re prepared. If you take the right steps, you can gain valuable assets that will make you money and improve your portfolio.