Investing in shares :
It is an absolute necessity for each and every individual to understand how money works. Money inflows into your pocket and Money outflows from your packet. If you have not worked out how much money that you could spare per say at the end of every month to invest , that is a first step to start.
Where is the money?
Have you have worked out much money that you can spare and, out of which how much you can invest in shares ? After that, below is the quick checklist to consider.
- Its risky : Unlike other investment options out there, share markets investment is risky. You could loose your money if you invest in a wrong company or at a wrong time or even for a wrong reason. So, consider the worst case of loosing all that money and work out your financial situation based on that.
- Its volatile : Markets are volatile, you may not be able to cash out the money when you need it as pulling out the money at wrong time may come with capital losses. So, commitment is required.
- Brokerage charges : Every time you buy or sell a stock you will pay fee to the broker, so if you want to buy stocks for short term gains , leave enough margins to yourself.
- Taxes and regulations : Depending on the place you live in and the place of companies that you buy stocks from , you will be subjected certain regulations and capital gain/loss taxes. So, get an idea.
- Managed funds: It takes lot of time for you to find the right company and understanding the fundamentals, past history and predicting future of the it over short, medium and long term. If you have do not have enough time for that, you could use the professionals to invest the money for you to start with. You invest in managed funds and they invest in the companies for you. Win, Win.
What is your strategy:
Steady income vs capital growth:
You could make money in two ways as an investor from share market.
Some companies pay monthly or quarterly portions of their profits to the share holders. Yes, I mean Dividends !!!.
Some companies will reinvest the profits back into the business to generate more profits through increasing their market capitalization i.e increasing their product, service offerings or even expanding the existing offerings to more customers. This increases the company value and thereby the share price. so you can eventually sell the shares at a higher price than you bought.
Generally, if you are in your 20's or 30's, then consider capital growth stocks over dividends. After all, you need money at later stages of your life, so reinvesting the money that you would have otherwise been paid in dividends back into the market make sense.
That said, there are companies out there which can pay you dividends and as well as grow over the period. Growth and dividend stocks for the mixture of both worlds.
Short term vs long term:
When investing in share market , you must ask yourself how many days that you are willing to hold that investment.
From the day traders: who buy and sell on the same day, there are share holders holding the stocks for decades.
Consider investing for the long term, that gives you peace of mind and you do not have monitor the share market every second. However, re-balancing the portfolio is required at times to limit the losses but otherwise you buy and forget about it and let the market do the magic over a period.
Here is another article where I wrote about investment: Investment Secrets
