The Do’s and Don’ts of Investing in the Stock Market

The stock market has taken a pretty heavy hit the past few years, especially during recent recession times. For those with some money to invest, especially those new to investing, the stock market used to be a natural choice. Today many new investors are leery, especially when faced with news about the “Dow dropping…” so many percentage points.

Does this mean it’s a bad thing to invest in the stock market? Investing in stocks can still offer a good return on your investments, but it’s important to be aware of a few things. First and foremost is the fact that the stock market has it’s ups and downs. It’s not considered a game, but rather a business by those involved. It’s also a competitive business, and to investors, it can feel like gambling at times. You are taking a chance that the money you invest will make money for you. Sometimes you lose money, just like with gambling. If you play that hand of cards well, and have some ideas on how to go about beating the odds, you come out a winner. So, what are some things you might want to know before taking a gamble and investing in the stock market?

Stock market investments are owner investments, not loaner investments, such as money in a bank savings account. In that case you are loaning your money to the bank so it can make money from your money, while paying you a small dividend (interest) based on amount and length of time your money is on loan to the bank. With the stock market you are investing in equity, not debt. You are owning part of the company, sharing ownership with others who also own stock in the business. When the value of the company changes, your share’s value changes. A business is financed through the money collected from investors, making the investors part owners, and the ownership is represented by the stock. Because it is riskier, it will generally pay more.

World profits

Keep in mind the old adage about not putting all your eggs in one basket. Go for several different stocks, and if you can’t afford more than one or two at the most, try owning a “slice” filled with a variety of companies by investing in a mutual fund. And rather than investing all your money in one swoop, keep a bit aside and add in small amounts each month. Should the market fall you can then buy at lower prices.

Any money you might need in five or even ten years down the line should not be invested in the stock market. Your risk is much lower when money spends a longer time in stocks. This goes in hand with how much money one should invest in stocks. One financial expert advises subtracting your age from one hundred, and that is the amount to invest in stocks. Which means the older you are, the less you’ll invest in the stock market, the more you’ll put into a loaner investment such as the bank. You don’t want to be so over-invested when you are older that if the stock market takes a hit you’ll feel forced out of retirement. Stocks are generally considered long term investments. If you are young, this can be to your advantage. You can survive dips in the market, and possibly be well rewarded with the long term gains. Later in life those stocks can be turned in to bonds for some retirement money.

Which type of shareholder in a company is best? With the two types of shares in a company – common shares and preferred shares – if a company goes bankrupt, both types of stockholders end up behind creditors when it comes to getting any money back. Yet a preferred shareholder has a higher ranking, and stands a better chance of getting part of his or her investment back if a company goes under. Higher dividends, and a say in company decisions, are two additional benefits of a preferred shareholder.

Remember, there are no guarantees with stock market investment. With the inherent risks involved, make sure you deal only with registered stock brokers. Beware of rumors and tips and “guaranteed” returns. There is no real guarantee in the stock market, but with some wisdom, and careful investing, you can make a nice profit down the road.

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