5 Things Beginners Should Know Before Investing in the Stock Market

For a novice, beginning to invest in the stock market can be a little scary.While beginning investors are just looking at trends and hoping to start bringing in additional cash flow, investors with years of experience are being taken out these more harsh times. 

Remember the days of investing in internet stocks that seemed guaranteed to make money? These early investments felt like intelligent decisions at the time, particularly between the Dot-com bubble of 1995-2000. After the bubble burst, it took nearly a decade for the Nasdaq to rise back to the same spot. 

Beginning investors may wonder, “if the market is volatile, should I even bother investing?” 

With time and experience, new investors can also begin to generate respectable amounts of additional income by investing in the stock market (these are our choices for the best online stock brokers for Beginners (Our Top 8 Picks of 2019)). While investing is always a risk, there are steps for beginners to take to help avoid failure and mitigate risk. 

Have an Emergency Fund Set Aside

An emergency fund is not meant to be spent lightly. This fund is designed to help you easily get through an unexpected crisis such as a job loss, illness, or any other situation when funds are needed immediately. You can easily begin to build an emergency fund by setting aside a predetermined amount of money each month. Many beginners choose to also add money from their tax refund each year into this account. 

Your emergency fund should be highly liquid and cover 3-6 months of expenses. This includes all bills and living expenses. It’s best practice to put this money into a high interest-earning account. This allows your emergency fund to slowly build. Don’t use this fund unless it is truly and emergency!

Diversify

Have you heard the phrase, “don’t put all your eggs in one basket”? The same goes with investing in stocks. Any smart investor will never have all of their money just in stocks. Wealth should be spread around to other places such as bonds, mutual funds, fixed deposits, etc. Stocks are just one piece of your portfolio, and with diversification you minimize the risk of losing all of your money. 

What’s Your Net Worth?

Net worth is your total assets minus your total liabilities. Assets are anything you own that can generate cash flow such as your mutual funds, stocks, or cash. You liabilities are monies owed including bills, loans, mortgage, or credit card bills. 

List out your assets and liabilities to create you balance sheet. It’s helpful to analyze your balance sheet and review for any changes that can be made. For example, if you have high-interest debt you should try and pay off this debt first. You may also find depreciating (losing value) assets, such as your vehicle. Depending on what the depreciating asset is, it may make more sense to sell it off as soon as possible. 

Create a Cash Flow Statement 

Cash flow statements are similar to balance sheets. However, variable assets and liabilities are substituted for expenditure and income. Your income includes salary, money collected from rental properties, dividends, etc. Expenditures are everything else such as loan payments to your grocery bills. You cash flow is your income minus your expenses. 

If you find that your cash flow is in the negative, you shouldn’t spend any money in the stock market. Try to minimize your expenses first. Can you cut cable, limit going out to eat, or find lower rates on your car insurance? Try and save as much money as you can. Once you start looking for ways to minimize expenses, you’d be surprised at how much you can save. 

Investments and Speculation

What are the differences between investments and speculation? Investing analyzing stock, then putting your money in those stocks and hoping the money will grow. Speculation is more like gambling. You invest and hope and pray the money grows without much prior analysis. This is why it’s important to do your research. When you invest money, you’re essentially purchasing a piece of the entire company. Just because the market is investing in a particular stock doesn’t necessarily mean it will do well long-term. 

With careful planning, research, and experience, you can make your money work for you by investing in the stock market. Avoid investing in stocks through speculation and have good judgement – you can definitely contribute to your income significantly this way!

Following these steps can help you mitigate potential risk and be prepared for any and all circumstances. 

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2 thoughts on “5 Things Beginners Should Know Before Investing in the Stock Market

  1. I agree with all 5 points in your list. A beginner definitely needs to do some personal finance prep work before they start investing. One of the most important things to take care of is your high interest debt. New investors might not always realize that credit card debt is washing out their investment returns!

    Great article
    -DS

  2. Great suggestions. I’m doubling back right now and pausing on additional investing for the moment while I finish off building my 6 month emergency fund. Maybe it works out for some people, but my few (small) attempts at speculation have generally failed spectacularly in the past. Long term dividend investor all the day at this point.

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