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Stock market investing can be a prudent financial decision. However, you must educate yourself first. Also, you’ll need to manage your funds wisely.
Moreover, like an old English proverb says, “A fool and his money are soon parted.”
Unfortunately, too many people are tempted to throw caution to the winds. They think they can get rich overnight in the stock market, but this is seldom the case.
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Experts generally recommend that you consult either a broker or an investment adviser. However, it is possible to work out an effective investment strategy on your own. Do this by conducting the appropriate research.
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Take Some Advice from the SEC
For instance, the US Securities and Exchange Commission (SEC) has detailed some important steps. Follow their advice, as it can help you to define and meet your financial goals. Here’s the gist of their Roadmap to Saving and Investing:
Define Your Goals
Determine an acceptable time frame for meeting specific goals. Do this by calculating what you’ll need to save each year.
Evaluate Your Finances
Create a personal net worth statement. That is, look at what you own alongside what you owe. Next, determine whether you have a positive or negative net worth. In other words, subtract your liabilities from your assets.
Start Tracking Your Income and Expenses
Tracking your income and expenses will tell you how much of your income you have available to invest.
Take Advantage of Compound Interest
Leveraging even small amounts of money in savings can lead to big returns because of compound interest. In short, avoiding impulse purchases could be your key to financial success.
Eliminate High-Interest Debt
Experts encourage consumers to pay off credit cards before doing any stock market investing.
Put Money in Savings
Even though your money will earn a low interest rate, it’s typically safer to put it in savings accounts, checking accounts, and certificates of deposit. That way, your money will be insured.
Assess the Risks
You always assume some degree of risk with stock market investing. It’s true that returns on successful investments can be greater than many other options. However, in some cases, it’s possible to lose the entire amount that you’ve invested.
Understand Your Risk Tolerance
If you want your money to grow faster, you might have to consider riskier investment products.
Know Your Investment Options
There is a variety of products for consumers to consider for stock market investing. For example, you could invest in stocks or mutual funds. There are also corporate and municipal bonds, annuities, exchange-traded funds (ETFs), money market funds, and U.S. Treasury securities.
Know the Types of Stocks and Their Costs
According to Nasdaq, there are two different types of stocks when it comes to stock market investing. That is, there are full-service stocks and discount stocks.
Investors with a higher net worth typically partner with full-service brokers. These brokers provide them with stock recommendations, guidance, and so on.
However, if you want to stay in charge of all of your investment decisions, then seek out a discount broker. That’s because discount brokers charge significantly lower fees than full-service brokers do.
What Fees Can You Expect?
There are two main fees that investors incur in with stock market investing. The first comes in the form of commissions every time you purchase and trade stocks. These fees can range from $10 to $30 per transaction through discount brokers.
Additionally, there are mutual fund fees. These are the fees that you’ll incur when you invest in mutual funds.
Remember, the best way to manage risk is by investing in a range of assets. This is also known as diversification. For example, a well-diversified portfolio will often incorporate mutual funds that include a large number of stocks and other investments.
Should You Invest in Products or in Stocks?
A concept that some people struggle with is whether they will earn more from investing in a stock or in a product.
To answer this question, a group of consumers conducted in-depth research on 35 different companies. They sought to determine how much they would have made if they had invested in a company’s stock instead of buying that company’s product or service.
Apart from a few exceptions, these investors concluded that an investor would make a profit if they invested in a company instead of purchasing that company’s product. The key takeaway was that the changes in a company’s stock value can dramatically alter an initial investment.
Educate Yourself Before You Begin Stock Market Investing
Finally, it pays to do your homework and educate yourself before you begin investing in the stock market. Follow the suggestions here and you’ll be sure to have greater success with your own stock market investing.