Money begets money. This phrase is the goal of the smart investor. The speed by which you can churn and exponentially grow your money is the measure of financial victory. But for the soon-to-be investor, the financials market is an intimidating marketplace. While access is not denied to anyone with funds to spare, the choice of where to place your money with fewer risks, or none at all, is still a big question mark.
THE STOCK MARKET IS THE FIRST OPTION
The first likely option is the stock market, a vital economic indicator in nearly every market economy worldwide, whether big or small. The US stock exchange today can be likened to a fashion event, where stock prices are trend driven.
For example, listed companies engaged in online social media and social networking services like Facebook generates so much interest among investors. On the other hand, listed tech companies like Apple and Samsung benefit when Facebook is trending. There is a direct connection because users of their gadgets like smartphones, tablets or laptops are perpetually wired to social networks.
Benefits of Investing in the Stock Market
It is natural for first-time investors to feel apprehensive entering the financials market, the stock market included. However, if generating real wealth is the objective, investing in stocks is one option if you have excess funds.
- Financial objectives can be achieved over time
- Better allocation of investment budget with a variety of securities across different industries.
- Buying and selling stocks is a technical skill that can be developed over time.
- Risks can be managed with proper strategy.
- Stock returns can offset inflation which currently hovers around 3.0%. Any gain above the inflation rate is ideal.
Guide to Investing in the Stock Market
1. Set A Definite Financial Goal
Are you investing for the future or are you after a quick windfall within a short-term period? Setting a clear-cut purpose is important before any investment undertaking.
Consider these three main factors:
- Amount of funds available for investment
- Your expected returns on your investment
- The holding period of your investment
2. Learn The Basics
Study the essentials of stock trading. Learn both sides of the equation: buying and selling. Buying is choosing the stock while selling is the exit mechanism to get your money back.
At the onset, your focus is to purchase blue chips, if not the good-performing securities, rather than the whole market in general.
3. Risk Philosophy
Where money is concerned, people have differing risk tolerance. What is yours? You should have a clear perception of the risks involved when investing in the U.S. stock market. Understand the market volatility and know that price changes are daily occurrences.
The U.S. stock market is always a risky business for the seasoned investors as well as the newbie. Remember investing your bottom dollar is ill-advised unless of course you are prepared to grind your teeth when the going gets tough.
4. Spread Your Risk
"Don't put all your eggs in one basket" as it is often said. Yes, it’s true and that’s the golden rule even in stock trading. Limiting your exposure to selected stocks from different industries is the beginning strategy.
Spreading your risk is a sure fire way to manage your investment and it gives you better control of losses in case one or two of your stocks turn sour. However, only earth-shaking developments will cause steep price drops otherwise you are navigating the right path.
5. Income Generation
The market value or the stock price is dependent on a company’s profitability. It is fundamentally based on a profit and loss situation. When a company is doing badly, expect the price to drop. When prices surge as a result of good performance, investors realize gains.
6. Do Not Borrow To Invest
While earning a profit over a period of time is the objective, using borrowed funds to invest is a no brainer. You will only compound your financial woes if your investment does not turn out right. Aside from the losses, payment for the loan plus interest is a heavy burden to carry.
STOCK MARKET VERSUS OTHER INVESTMENT OPTIONS
Investing is not limited to the U.S. stock market. There are other alternatives where you can make your money work for you. The next 3 top options are as follows:
Unlike stocks where you purchase to own a piece of the pie, you are lending to a company when you participate in a bond offering.
To make the distinction clearer, owning means you are a shareholder of the company and is entitled to the following: voting right, share in the profits thru dividend payments. With bonds, you are a creditor and do not have voting rights.
Bonds offer fixed-income where you receive pre-determined interest payments on specified periods however, returns are moderate. Your investment is redeemed on the maturity date. The term usually ranges from 3 months to 30 months depending on the borrowing company’s funding need and repayment schedule. You risk losing your investment only in the event of bankruptcy.
Purchasing hard assets like real estate is the most tangible investment. This is a physical commodity that can be acquired to serve an economic purpose. Your income can be derived from rentals and property value appreciation or both. This is a new offering for investors willing to place their money in a pool of funds to be lent out to individuals who do not qualify with the traditional sources like banks and other financial institutions. The model is still underdeveloped thus, the headway it will create for investors is still to be determined.
Investing in the stock market is a stimulating game for an investor. You can expand your wealth in stock trading but it is serious play. A greater part of your success will depend on how well you can analyze the fundamentals and know the forces that drive the stock market. In the long run, you will reap the benefits if you play your cards right.
3 Mar 2017 4:38 PM | Anonymous