So you have decided to start investing in stocks.
Do you know where you should begin your journey?
Do you know how to choose a winning stock to invest in?
More importantly, do you know what you should do before investing in stocks?
If you don’t, the first thing you should learn is the basics of the stock market.
Analyzing a company before buying or selling a stock will help you to find the real value of the stock to make profit from your trade. To buy stocks you need to have money, information and knowledge.
Before getting into stock market ask yourself;
- What you want to accomplish by buying or selling a stocks?
- What do you want to do in the stock market, investing or trading?
- What is your goal?
- How much money can you afford to buy stocks?
These questions will help you to know from where you should start and how.
While defining financial goals, you must categorise it to long-term, medium-term and short-term. This will help you to plan your stock purchasing program.
Stocks are a great tool you can use to achieve your long-term financial goal. In general, stock investing is not to achieve your short term goals, which you want to achieve within a year or two.
When you wisely choose stocks for long-term financial goals, in the right environment at a right price, they will do a great job. But, if you speculate, they can lead to disaster.
Don’t consider stock investing as a get-rich-quick scheme.
Remember, success in investing is not what you invest, it’s the way you invest. A particular strategy is working for someone, it does not mean that it will work for you.
Understanding your current financial situation and formulating your own investing style by keeping financial goals in mind are the first steps in successful investing.
If you can’t regularly review a company’s financial statements and progress, then better to invest through a mutual fund or take help of a financial expert.
You are also required to assess your own financial situation and know how stock can help you in getting what you want in life. Let’s discuss the steps you should follow in managing a fund while investing in stocks.
Decide what your investing goals are
We have different people in the stock market. All these market participants invest for different reasons.
Few of them are looking to build wealth in the long term, known as value and growth investors. Others are looking for an income stream to have regular income to take care of monthly expenses, known as income investors. Some of the market participants also trade in the stock market for a potential big gain.
You need to know why you want to invest in the stock market and what is your financial goal you want to achieve.
Know how much you can afford to invest in stock
The first thing you need to invest in the stock market is money.
You need to ask yourself, from where you can get that money? Is your current financial condition allowing you to invest surplus money to buy stock?
The biggest question you should answer first is how am I going to fund my stock program.
For you, it’s a must to know how much you can afford to invest in stocks by taking all your financial obligations into account.
To know how much you can afford to invest, you have to first list down your own assets, liabilities to find out your current net worth. Net worth is total assets minus total liabilities.
Liabilities are simply the bills that you are bound to pay. It can be your credit card bills, mortgage payment and other financial obligations. If certain liabilities like debt which carries a high interest rate creates problems, try to minimize the cost of carrying debt.
Net Worth calculated by using the above formula shows your actual personal wealth. Your main objective to get financial freedom is to ensure that your net worth increases year to year.
Networth will increase when you bring in positive cash flows into your account. Negative cash flows depletes your wealth, if you don’t take any action, it may wipe out your entire net worth.
Then in the next step, prepare your own income statement. In it, you have to list down your income and subtract from it all your expenses to know how much you left with.
If total income is more than the total of expenses, then you will have net income or profit.
On the other hand, if total expenses are more than the total of income, you will have loss. If you have a loss, then the first thing you should do is proper financial planning. Additional income sources might help you to strengthen your income statement and balance sheet.
In case you have certain unnecessary expenses, then get rid of it.
When you have net income or surplus money every month, you can easily fund your stock purchases.
Create an emergency fund before investing in stock market
Emergency fund helps you through a temporary cash crunch. Therefore, make sure that you have enough money in an emergency fund.
You can open a bank savings account to keep emergency funds in it.
Your main focus should be to keep at least 5-6 months cash balance in this fund to take care of your gross living expenses.
In case of any uncertainty like losing a job, the amount in this fund can help you. You should not invest this money in stock. If you don’t have an emergency fund and your investment tank, you are putting yourself at risk of financial difficulties.
Find different ways to get money to invest in stocks
There can be plenty of ways to find money to invest in stock. Reallocating might help you plan your own style of creating money for investment.
Reallocating means, you sell some of your investments or assets and bring that money into stocks.
For example, if you have a real estate asset which has a good value, you can sell that asset to arrange funds for your stock market. Remember, we are not suggesting you sell you home. If selling the real estate asset will not impact your financial condition, then you can go for it or else try to arrange money from some other genuine ways.
If you have Rs 10,00,000 in bank fixed deposit, then you can bring Rs 5,00,000 to stock and keep the rest of the amount to take care of any emergency situation.
The main focus would be to find out what investment or asset you can liquidate to arrange money.
Here are certain things you must know before getting into stock investing;
- Find out from where you can get information.
- What you want out of your investment: capital appreciation or dividends
- Do your own research instead of relying on others.
- Choose the industry first, before selecting the stock.
- Understand how your stock reacts to economic downturn, market risk, politics, government decisions and industry issues.
- Formulate your own investing strategy and test it before getting into the live market.
- How can you increase your income? The more you earn and the more you decrease your expenses, the better.
- How to cut your non essential expenses?
- How to lower your debt repayments?
As an investor or trader it’s vital to keep up with market news and opinions. Read financial news, blogs and research papers from financial institutions to update your knowledge and skills.