What To Think About Before Investing In Stocks

April 27, 2023

One of the most common investments individuals hear about is stocks. While the basic premise of 'buying a small portion of a company' is well understood, the considerations individuals should have before purchasing stocks are far less clear. One of the fastest ways to get into financial trouble is to dive into investments of any kind without doing your due diligence beforehand, and the same is true for investing in stocks. Much of this research can be done on your own to make the most informed decisions possible.

Start reading now for a full list of things to consider before buying stocks.

Financial Goals

Before you make any investment, decide why you are investing and what your ultimate financial goals are. Do you want to retire early? Do you want to travel a lot in retirement? Do you want to have quick access to your funds or are you okay with locking in funds for decades at a time? These types of questions are just the tip of the iceberg when it comes to all of the things you should be considering before setting these goals and ultimately making the decision whether or not to invest in stocks. For example, for those who plan to retire early, consider investing more heavily in securities that provide regular income, because most retirement accounts cannot be accessed until later in life without a penalty fee. Those who plan on traveling a great deal in retirement typically need to invest more money throughout their career than those who plan to live a simpler and less expensive retirement.

Clearly listing your goals is a great way to begin the path towards them.Continue reading to learn more about considering goals before investing.

Term Goals

A great number of much smaller goals must be met before achieving larger goals, which is why goals over particular terms or benchmarking goals may be an important consideration before choosing to purchase stocks. It is important to have a mixture of goals in both the short-term and long-term. Only short-term goals lead to a loss of focus on the bigger picture while focusing on long-term goals may leave you feeling as if it is an insurmountable task. In the short-term, a great goal could be to research investing further to see what you want to get out of it. The value of knowledge in relation to investing is worth far more than any single stock an individual could purchase. Make this a recurring goal to learn something new or read up on a new stock you’ve been dying to invest in each day so, over time, you will have acquired a breadth of knowledge no amount of money could ever buy. In the long-term, you could aim to have invested a certain amount by a certain age. The key is to keep these goals ambitious yet realistic.

Continue to learn about the two main ideas behind stock investing.

Growth or Income Investing

Before investing in stocks, you should know what type of investor you are. The two main ideas behind stock investing are growth investing and income investing. Growth investing involves someone investing in stocks now that they expect to grow so they can sell them at some point in the near or distant future for a profit. Conversely, income investors usually seek stocks or other securities that pay out regular dividends or cash that can suffice as income. They then have the choice to either spend or reinvest this income, which can grow wealth even further over time. The type of investments right for an individual usually tie back to their overarching goals. For example, those who may want to retire early and need some form of income before retirement accounts can be accessed may seek more income driven investments, while those who plan to work linger may find investments better suited towards growth investing. By recognizing the type of investor you hope to be, you can narrow down your scope of focus.

Of course, risk is a big factor when it comes to investing. Keep reading for details!

Exploring Risk

Risk tolerance among investors can greatly shape the stocks or other securities they may buy. Usually, lower-risk investments will have smaller return but have a much better chance of not losing money, whereas higher-risk investments can potentially yield large returns while having extremely volatile characteristics. It should be well understood that past performance of any stock is not indicative in any way of future performance. Stocks worth a bundle today could be worthless tomorrow, and there is no way to get your money back. The biggest question investors must ask themselves is how much are they willing to risk to get a potential payback. A good rule of thumb is for newer investors to test the waters in their infancy with safer investments and then gradually branch out to more risky investments that could yield high returns once they have a firm grasp on the investing process.

Continue reading to enter the debate between mutual funds and individual stocks.

Mutual Funds Or Individual Stocks

Investing in single stocks is not the only option for investors who seek this kind of exposure. Mutual funds also exist which act as a pool of securities designed to mitigate risk. A mutual fund may hold dozens or even hundreds of stocks, which can be part of a similar sector or completely different from one another. This way, if a single stock is doing very poorly on a certain trading day, the rest of the stocks in the fund doing better can help keep your average return up. If you buy a single stock and it does poorly, you are stuck with the results. Conversely, even if a stock does incredibly well, poorer performing stocks in a mutual fund may keep you from realizing big profits. Those who can spot individual stocks set for big growth can profit handsomely from it. Again, weighing risks is the key to making any financial decision.

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