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How to invest in stocks

Personal finance risk management practical examples

You have come here to have insights about the investment in stocks? This is the right platform for you, as we are going to teach you step by step process for investment.

When invested in the right place and at the right moment, stock investing is the most powerful gateway towards achieving your financial goals. Let’s dive into the step by step process so you get clarity about the investing strategy.

Check your comfort zone

While deciding on investing in stocks you will come up with two major options; Investing in individual stocks or you can choose to invest in index funds. You can invest in individual funds if you are really willing to spend time following the market performance and analyzing the changing trends.

This is essentially a job for a trained fund manager or financial analysts. So, if you have both the desired time and training, then you can go for the individual funds.

Now we come to the second option and that is investing in Index funds. Index funds are the passively managed funds that track the stock performance of the indices. Like the S&P 500 tracks the largest 500 companies of the U.S stock.

If we take actively managed and passively managed funds into comparison, Index funds are more recommended as the expense ratios are much lower and chances of the financial success are higher in the long run. Since its inception the S&P 500 has returned a historic average annual return of 10%, this can be seen as the mirror of the performance of the index funds.

Question 8 - What is a stock?

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Deciding the amount of your investment

This decision will be based on your age, annual income, and financial challenges you have to meet in the near future. If you are young then you have more time horizon that may allow you to put yourself into risk for potential returns.

All investment plans should be based upon the long term returns, and statistically speaking the stock market is very volatile and has much uncertainty in the short term. So, you must not be going to invest money that you might need in the upcoming five years at least.

Investable money 

This is money that you won’t be needing in the upcoming five years in general. This decision will be based on your age, annual income, and the financial challenges you have to meet. If you are young then you have more time horizon that may allow you to put yourself into risk for potentially higher returns.

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As you get older you are less likely to be tolerant towards the volatility of the market and can’t really stay reliant on the returns of your investments. So in short, the more your age is and the closer you are to retirement, the less amount of investment will go into stocks. There comes an exception if you are considering an early retirement plan.

Risk management in personal financial planning

Opening a brokerage account

To get your money invested in stocks, you need a special kind of account called the brokerage account. Opening a brokerage account is not a complex and time taking process at all.

If you want to invest in some near-term goal then the standard brokerage account will be the right option. This option allows easy access to your money, offering no tax-related advantages and your investment earnings are taxed.

In Individual retirement accounts (IRA), both Roth or traditional, you get an advantage with the investment tax, but you get some restrictions over the ease of money withdrawal.

 Choose the stock 

To be a successful investor you need to know the nitty-gritty of the market. A blindfolded investment without having enough research would end up losing the money. So, you are looking for ideas suitable for you as a beginner. Let’s take some points into account that would help you get started.

Example 4 - Investment portfolio

Go for your own forte

This means that you have your investment into the business you have prior knowledge about. Don’t be influenced by people around you putting you in a row of herds without having the current market evaluation. If you don’t understand the stock, just don’t jump in.

Diversification

This means that you are adding different types of companies in your portfolio. Diversification brings lessened risk and helps saving money when some of the stocks are not performing up to the expectations. But keep in mind that there is also a limit to the diversification as well. Over diversification may start troubling to get proper growth.

Educate yourself

Before investing in a market you should know about the metrics and market basics and have some research so you have a better sense of the market analysis. Otherwise seeing the market volatility might frustrate you. Lack of knowledge leads to a potential approach based on the end product of successful people. You will hear of the people who made their fortune but know that their knowledge was the tool that helped them get through the potential risks.

Continue the journey 

The stock market is very volatile and in the beginning, you might find it hard to continue. So, don’t get intimidated and hold on to the shares you buy. Don’t backtrack as soon as you see a market downfall. It takes some time to understand the market trends. 

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