This guest post is presented by The Digerati Life, a site that covers diverse topics in finance, ranging from reviews of the best online stock brokers to helpful tips on saving and frugality.
Stocks – they’re a great long term way of making money, right? Well unfortunately things aren’t that simple. We’ve all wished we were in there when Microsoft was a mere baby so we would be rich by now. But things don’t always happen that way and you should never jump into stock investments or open an account with a top brokerage without finding out where your money is going first.
Let’s get one thing clear here before you make any decisions on whether to get involved with the stock market or not. The big picture shows us the behavior of the stock market, which — historically speaking — shows us an upward trend. If you were to zoom in to analyze specific historical periods, you would see great successes for sure – but you would also see difficult points in the market where the financial landscape was littered with failed companies and fallen industries.
So what can we learn from this? Well the first thing you need to consider is how comfortable you are with risk. You might get people telling you that a certain stock is a ‘sure thing’. Let me tell you, there is no such thing as a sure thing when it comes to the stock market. It just doesn’t happen that way.
You may have heard this before but it’s true – you should never put money into the stock market that cannot afford to lose. Let’s pick a figure – say, $5,000. Now supposing you gave me this amount on the full understanding that you could lose it all. How happy would you be?
Now let’s say you DID actually end up losing it all (or a good amount of your investment)? Would you be worrying that your life savings have all gone? Would you be wondering how you can pay for your kids to go through college, now that you’ve spent some of their college fund? Or would you shrug your shoulders and say, ‘that’s life’?
You need to be in the third group to make this work. It’s as simple as that. While we would hope you’d make some cash out of this, you can never assume you will. And you certainly cannot rely on it.
Okay let’s move on: the question here is whether you’re from the camp that gets involved in trading with stocks and options, or are you one who prefers to invest over the long haul. So how do you feel about investing your money for several years? Because this is the way you stand the best chance of making a good return on your money. Historically, even when a recession has hit, those who ride it out and wait until the good times come back can expect to make a profit over the long term. Cutting your losses and running will provide you with just that –- a loss.
Some people do try to play the stock market so they can invest in a particular stock and then sell out after just a few days or weeks, when the stock value has increased. But this is risky and it involves knowing a lot about stock charts and the behavior of stock prices. It can be a full time job (quite literally) for some people –- and more often than not, average investors often lose money this way.
Only you can tell whether you are made of stern enough stuff to actually be able to successfully invest in the stock market. Whatever you do, give yourself enough time to learn the basics and decide, so you don’t rush into it and end up making a mistake.