Things to do before investing

Do These 8 Things Before Investing In The Stock Market

Publish Date: 11 Feb 2020

With the creation of the online broker, anyone with an internet connection and $100 can start investing in the stock market.

But before you invest your hard earned cash, think about your current situation, your current knowledge on the subject, and your long term financial goals. Stock market investing is not an overnight money making scheme, it’s a way to build your wealth over a lifetime of investing.

If you have any sort of excess income you should look away from the everyday savings account. The last time I checked inflation was around 3%, the average interest rate on a savings account was 0.1%. Meaning you are in a 2.9% deficit before you’ve even started. On the average year the stock market sees returns of just under 8%, so if you were to achieve half of that, your savings would be worth more year on year.

With that in mind, hopefully you see the advantages of investing in the stock market. But before you get going, here are 8 things you should consider completing.

 

#1. Learn the basics

Understanding the stock market can be achieved easily, all the information is right in front of you on the internet. Whether it’s my YouTube channel, my blog articles, or my online courses, you can become well educated on almost any investing topic (Hint hint).

Educating yourself is the most important step you take when learning any new skill, especially stock market investing. I’m guessing you haven’t had much experience with investing up to now? That is why it is vital you find some sort of education, most of it will be free, but I recommend you search for multiple outlets to get a variety of opinions and methods.

Not only will educating yourself help you feel less overwhelmed when hitting that buy button, but it will also help your profits. Learning how to find high quality investments, and how to execute them will help you progress faster.

Here are the first 3 things you should research:

  • Financial Metrics & Definitions: Understanding terms like P/E ratio or earnings per share and how to calculate them will put you above the crowd.
  • Stock Market Order Types: A few examples of order types are, market orders, limit orders, stop loss orders.
  • Popular Methods Of Stock Selection: Knowing the basics of fundamental & technical analysis and how they differ will help you figure out what strategy you want to follow when investing.

 

#2. Pay off your high interest debt

US Debt per category

 

There is no investing strategy that pays off as much as settling your debt. High interest debt in my eyes typically has interest rates of above 10%. This includes credit cards, payday loans, and overdraft agreements.

First of all, you can’t invest money you don’t have. If you are in $1,000 worth of credit card debt at 10% APR, and you have $1,000 worth of savings you want to invest instead of paying off your credit card. Here’s how the math works out.

Pay off your debt, then save more to invest.

 

Here are 2 scenarios you could consider when you are in debt

You have $1,000 saved up, but you also have $1,000 of credit card debt accruing interest.

 

Invest that $1,000 into the stock market with an average 8% ($80) return per year. Your credit card debt accrues 10% ($100) worth of interest in that same year. Meaning you’ve lost $20 on the overall transaction.

 

You pay off the $1,000 and spend the next 12 months saving another $1,000 to invest. You have not paid any interest... You are no longer in debt... And you have another $1,000 to invest in the market. Win Win!

 

#3. Build yourself an emergency fund

People get into debt because of unforeseen expenses, or tragic circumstances. So once you get out of debt, your next move isn’t to dive into an investment… It is to help your future self by planning for a flat tyre.

The general rule of thumb is, you should have at least 3 months salary as savings. I realise this might take a while but it is worth doing. You don’t want to be in a situation where you need to sell shares at a loss just to pay some bills.

If you struggle to save money check out my article on how to create a budget to save money.

You can open a general savings account from a high street bank, or you could use one of the many saving apps, I use Moneybox because the user interface makes one of the most boring things I do feel like a game.

Once you have built your emergency fund, you have to make a promise to yourself… Never invest that money! 

Let’s say you want to invest in a hot stock that’s on the up… You pull money from your fund, invest it, and a day later the earnings report for the company isn’t as good as you thought. The share price tanks 15%. Not only have you lost money from your fund, to replace it you either need to sell another stock you hold, or you’ll need to stop depositing into your trading account until it can be built back up.

 

#4. Decide which investing strategy you want to follow

There is more than one way to invest, you can develop your own strategy or algorithm, but beginners should try to stick to one of the more popular methods.

My 7 favourite investing strategies are:

  • Dollar-Cost Averaging
  • Dividend Investing (Income Investing)
  • Growth Stock Investing
  • Momentum Investing
  • Value Investing
  • Top-Down Bottom-Up
  • Small Cap Investing

 

Check out our other articles on the strategies for a more in depth look into what they are, and how they work.

The best thing about choosing a strategy is you don’t have to pick just one! You could be a dollar-cost averager, with a sprinkle of dividend investing, then only invest in small cap companies, all at the same time. 

My chosen strategies are dollar-cost averaging, because you get the market average on volatile stocks that helps reduce your cost per share. 

Also I am a fan of dividend investing, because why not invest in companies that pay dividend, but rather than withdrawing the earnings, I reinvest them to build my capital.

I also follow value investing which was invented by Benjamin Graham and later developed by Warren Buffet. This is because I not only want to grow my position by investing in good companies, I want to gain an advantage on the market by getting them at a better value. This is a more technical approach that requires more research, but I find it pays off if you know what to look for.

 

#5. Set yourself a long term goal

A long term goal is something that takes 5 years to achieve. Maybe you want to have your investment account balance above $10,000, or you want to achieve a 10% in 5 years, it might be something different like, you want to be an expert on one investing strategy, or develop good saving habits.

Most importantly you want to marry up your investing goals with your life goals.

Depending on your age or experience you will have different targets, but they should all be put on paper and reviewed every year, here is how I set my 5 year plan out:

You have a main goal, it’s enormous and quite daunting to think about. That is why you need to work S.M.A.R.T.

  • Specific: Make each goal clear with a specific end point
  • Measurable: Frame each goal so that you know when you’ve achieved it
  • Achievable: Think practically, you will have no motivation for an unattainable goal
  • Relevant: Do you goals marry up with your lifestyle goals
  • Time-based: Assign a time limit to each goal

 

Start by writing on a piece of paper 'Your Main Goal’. Then choose review points, these can be time based, so ‘after 1 year I want to be here’. This is so you can track your progress, if you don’t meet your first year goal, what went wrong? Was it something you did? Did you work hard enough?

Your investing goals should be what you think about before you execute every trade.

 

#6. Know the risks & control your emotions

There are risks in all investments, whether you’re getting into forex, stock & shares, or starting your own business, risk is always a factor. Your main challenge is to calculate your risk, understand that the worst could happen, then control your emotions so you can perform the task.

Risk tolerance is a psychological trait that differs from person to person. It can be influenced by a lot of things, genetics, education, income, and age. For example someone with a lower income that is older will have a more conservative way they invest money, because they can afford a high risk.

Another way risk tolerance is affected is by a person's perception of the risk. For example, in the early 1900s, flying in an aeroplane was considered a high risk situation, however, now it is a low risk mode of regular transport. On the other hand, in the early 1900s riding a horse was a common occurrence, but now it is considered more risky. This asymmetry is due to a person's opinion and perception of the situation at that time.

Perception is very important, especially in investing. As you gain more experience and knowledge such as, how much different industries are affected by news stories, you are likely to consider your investment choices to have less risk. As a consequence, you will let yourself invest in higher risk stocks, hopefully opening you up to higher gains.

Overall, understanding your risk tolerance will reduce your anxiety when investing, making more of the market available to you. Your risk tolerance hasn’t changed, your perception of the situation has.

 

#7. Stay away from social media groups

Do you know what the Herd Mentality’ is? It is a dangerous way to invest if you are a beginner.

I've seen more than a few Facebook groups, Instagram pages, and YouTube channels giving so-called ‘stock tips’. If you don’t do your own research, how do you know if this is a good investment? You would trust a stranger on the internet to tell you what to buy and sell.

Don’t get me wrong, I occasionally look on Facebook groups for ideas, but only ideas. I always go away with a small list of ‘tips’ and research them myself.

The herd mentality has caused massive market bubbles like the ‘.com bubble’ and the cryptocurrency bubbles. Some people even give false tips to drive prices up. It may seem harsh on the support groups for beginner investors, but if I’m investing my money, I wouldn’t blindly invest in something a stranger says is ‘about to go big’.

Sheep off a cliff

 

 

#8. Start from $100

You can start investing from $100, it may not seem like a lot but every little helps. Once you begin your long journey, you have plenty of time to build your portfolio.

There is no time like the present. With M1 Finance you can invest in fractional shares, so you don’t have to worry about your account size. Also M1 Finance is one of the market leaders in commission free trading… It’s 100% free to invest with M1 Finance.

Check out my review of M1 Finance against the other market leaders here.

If you sign up with M1 Finance through my exclusive affiliate link and deposit $100 into your trading account, you will be given full access to their training modules, where you will get advice and tips from the top investors that use the M1 Finance platform. Also you would be helping my website!

Head over to M1 Finance here!

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