How can a person decide if they should be investing in stock market assets?
A problem faced by us all - almost without exception - is that we would like to make more money without the effort of actually working to make more money. There may be the occassional billionaire that does not think this way, but for the rest of us, this is simply human nature.
real issue, however, is that we find it hard to see the potential
pitfalls and instead only see the potential gains from investing in
stock market funds or securities. We humans are naturally optimistic and too often we only see the potential upside in buying stocks. The image of Wall Street is one of nice cars, designer suits and big bonuses and we would like our little share of that life.
Whilst this site is obviously
written with investors in mind, we feel that we would be doing a
disservice if we did not try and convince those who should not be
investing to not invest. Sometimes, avoiding something can be the best
course of action. Therefore, this page is designed to help you understand whether or not you should run when you hear words like Dow Jones or mutual fund.
So, if you are thinking of investing in stock market products, we offer below a few thoughts or criteria that an investor should be able to fulfill before starting...
1. You plan to invest with money that is not needed for day to day living expenses. In the trade, this is considered to be money that a person 'can afford to lose'. Of course the reality is that none of us 'can afford to lose' our savings. However, there is a difference between having spare money that will probably be needed in three months time and having spare money that currently has no future requirement.
This is a very big deal. If you do not have much money saved, you should probably only consider a mutual fund or unit trust (at the most) for very long term investment and no more.
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2. The money to be invested is unencumbered.
It is not borrowed money. Having to make an investment work because there are monthly interest payments due is not how to operate a passive investment. Such tactics may work for businesses, but this is because they are in active control of the money and company.
Should an investment with borrowed money go wrong, the investor is faced with the prospect of repaying interest - and eventually the capital - on an asset worth far less - or possibly nothing - than was originally borrowed. Not nice.
In October 2008, as the world's stock markets crashed day after day, the true potential impact of too much borrowed money was demonstrated as retail banks, investment banks, hedge funds and investment companies were forced out of business with almost no notice, it seemed. These organisations had masses of short-term borrowed money which they were unable to refinance. They were left with no option but to declare bankruptcy.
There is a lesson here and it is that borrowed money can be deadly when the stock exchange is involved. Typically, there are very few big swings on the NYSE or NASDAQ, but they do occur and when they do, lots of people are wiped out by the two most frightening words in finance: margin call.
3. The money does not need to be accessed for some time. Stock markets and individual securities can be illiquid. This means that there may not be buyers when you want to sell. The smaller a company is, the more likely it is that this may happen.
It is generally suggested that money used for stock market investments should not be needed for the 'medium term' - which is often considered to be 3 to 5 years. However, others suggest that money should be tied up for 5 to 10 years. Either way, if an individual needs money in 6 months time, it should not be invested in the market.
This clearly relates to point number one on this list, but it is important. It is a lesson that your author has had to learn the hard way as a beginner when short-term cash requirements (for replacing a dead car) forced the sale of shares at below purchase price. When stock prices fall - as they will - the loss is only 'on paper' but if you are forced to sell, the loss becomes a real one.
4. The person investing (you?) should be willing to do at least some work. In reality, for the majority of people who invest in a diversified fund (like a mutual fund) and save into it each month from their wages, this won't take a lot of effort. Perhaps 30 minutes to one hour each week should be plenty. This comes down to reading the financial pages of a daily paper and keeping a close watch for mentions of the fund, sector or market in which you are invested. Understanding what is going on - and even better, why it is happening - will make decision making far easier.
But an investor really ought to be willing to put in this one hour each week as a minimum. If you plan on buying stocks directly in the market, you should be prepared to invest more than this one hour each week.
5. Are you psychologically stable??? Ok, so we ask a little sarcastically. But, we have all met people to whom the idea of losing even £1 or $1 is intolerable and this causes them massive mental anguish. Are you one of these people? If you are, stock investment may prove to be a very stressful experience. If that is the case, why bother? Don't take the risks and avoid the worry completely.
There are some things we should not do in life and if such risks really are mentally overwhelming, just don't do them! In such circumstances, avoidance of the Wall Street Journal, MSNBC and CNN is to be recommended. Going further, words like penny stocks and day trading should be considered to be contagious and you should have no contact whatsoever!
If these elementary criteria have not put you off
investing in stock market assets for life - and we hope that they have
not - following some of the below links to other pages may prove to be
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Other pages related to the stock market and trading include:
Does The Stock Market Overreact?
Are You An Irrational Investor?
How To Find Great Stock Trading Courses
Stock Trading For Beginners
Why Use Stock Market Programs?
Does Automated Stock Trading Software Work?
Why Do So Many Stock Market Traders Go Broke?