Before you can really start investing, following top 10 things you have to think about:
- Do you have enough money to invest?
I think most people in young age fail to do proper planning for their finances. For example they might go out and buy a house prematurely. I know a colleague of mine who ended up making huge losses on the condo he purchased during 2007-2008 timeframe. Since he was early in his career, he had to eat those losses and sell the house at a much cheaper rate than what he bought it at.
Ideally one should sit down and plan the finances for next 3-5 years before making any investment decisions. Do not think month to month, think medium to long term. Then start allocating small chunks of money into various investment vehicles. It can be buying a house, purchasing stocks or anything.
Stock market is a risky bet as you don’t really have anything tangible as you do when you purchase a house. Due to that reason, you should only allocate the money into the market which you don’t need anytime soon. So do you have a chunk of money which can be put into the market?
- Goal for investing
Now the second thing you should figure out your goals for investing. My personal goal when I was 22 years old was to grow my money rapidly. That may not be suited for everyone. So some possible goals are as following, you have to pick yours:
- Rapid growth
- Moderate growth over long term
- Additional income
- Sole income (plan to trade full time)
Timeframe for investing is equally important. You absolutely have to know your timeframe. Are you thinking about buying a house few years down the line? If so, are you going to need some cash out of your investments to make that purchase?
Will you need money to buy a car next year?
Are you getting married in 6 months and need money for your honeymoon?
These are the kinds of questions will help you narrow down how much money you can spare for investing at what risk level and for how long.
Risk tolerance allows you to figure out the instruments you are going to be trading. Somewhat risk averse people will / should choose for real estate for example. People are who want to play really safe, should look into municipal bonds etc. which have guaranteed returns over the years.
People are who want to be aggressive and grow their money fast, should look into stocks. There also you can find people trading small cap stocks which are much more volatile. However such strategies involve significant risks and you can blow up your account in a matter of days if you aren’t careful.
Are you comfortable choosing your own investment vehicles (maybe with little training) or do you need an advisors. Advisors usually come with a fee, so you have to invest enough cash to justify their costs. Otherwise you can go through some do-it-yourself-guides online for investing and start your investing journey.
Do you have a fulltime job? Can you spend 1-2 hours daily to research your stocks or you want to focus on your job and maybe look at investments as a side thing you review every month? That makes a huge difference in your style.
Is the any specific industry or sector which you understand well? If so, you might want to research stocks from that industry as you will know how to shortlist those and review them. If not, you might want to look at index funds etc which put their money into a basket of stocks from various industries.
You have to figure out your retirement planning as early as possible so that you can start putting some money aside in IRA accounts etc. That money you should probably play safe with as that is something you will require when you aren’t in the best earning capacity.
Look at your tax bracket. Contributing to IRA helps reduce your tax liability. Also holding period for stocks determines your tax rate on any gains you have made. If you hold the stocks for less than a year, any gains become part of your normal income and get taxed according to your tax bracket. However holding more than year makes it capital gains which is usually around 15%, much lower than normal taxes.
Now when you are ready to start investing, first thing you need is to figure out which brokerage firm you want to use. You will see so many advertisements on TV, Radio etc. that you might be feeling overwhelmed and confused. Don’t worry about that part at all, we have done lot of research to help newcomers. Please check out our resource area at the bottom for further instructions.
Hope this guide helped people deciding if they are ready to start investing or not. Also it should help get you started in the right direction. Please contact me via below authors area for any specific questions, I am happy to assist.