There is a dilemma about investing in the stock market. You typically invest in a company because you are convinced their stock is going to go up. The problem is that you are probably buying the stock from another investor who is equally convinced it is going to go down. Investing in the stock market involves risk, so it is imperative that you get prepared before you start investing your hard earned dollars.
Make a budget. This is the only tried and true method of determining how much money you have available to invest. Be sure to include all of your income from all sources, and all of your expenditures. Allow yourself some discretionary spending money that's just for fun. Budget money for savings that is completely separate from money for investing. You want your savings money to be someplace safe, like the bank, where you can get to it immediately if you need it. If you are in debt, the best investment you can make is to pay off that debt before starting an investment program.
Determine your investment goals, objectives and temperament. You should consider your age, how much you have to invest, how long you can afford to leave your investment alone and how much risk you can handle. Typically, the younger you are, the more risk you can afford to take because if you take a loss early, you still have time to make it up. Older investors may be more conservative with their investments and be more interested in stocks that pay regular dividends while preserving their capital. If you lie awake at night worrying about how your investments are doing, chances are your risk tolerance is quite low. If you like to toss the dice and don't mind losing from time to time as long as the potential rewards are high enough, you might be an aggressive investor.
Decide whether you are an active investor or a passive investor. Active investors are hands-on investors. They do their own research, make their own investment decisions and control their own stock portfolios. Passive investors rely on the expertise of others to make their investment decisions. This may include taking the advice of a stockbroker or investing in mutual funds that rely on the expertise of fund managers to determine the stock portfolio within the fund.
Find a broker with whom you are comfortable. There are three primary types of stockbrokers. Full service brokers typically provide personal service. They may do a detailed financial evaluation and offer stock recommendations based upon your particular situation. Full service brokers charge the highest commission rates for their services. Discount brokers offer fewer services, but will execute your orders at a lower commission rate than full service brokers. Online brokers offer investors who are willing to make all their own investment decisions, a means of completing their stock transactions for the lowest commission rate.
Research your investment. Determine the companies in which you have an interest. Contact their investor relations department and request an annual report. Pay special attention to historic stock prices and dividend payments, but keep in mind that past performance is never a guarantee of future results. Keep a watch on news reports that affect the company or the types of products or services with which it is involved that may have an impact on the company's stock price.
Enter a buy order once you have determined the number of shares you wish to purchase and the price you are willing to pay for each share. Stock must typically be purchased through a broker. You can place the order at the market, which will execute at whatever price is offered on the open market when your order is placed, or you can put in a limit order, which specifies a price above which you will not pay. This order will not be executed if the price is higher than the one you specify.
- Investing in stock involves risk. You may lose some or all of your investment.
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