So, you have decided that you want to start investing. After you have gotten over all of the euphoria about how you are going to buy stocks to get rich; it is time to actually develop a plan. Stock investing is by no means a get rich quick formula. It is a wealth building process that may take years to see results. Before investing in any stock, you need to be aware of the risks involved. There are ups and downs when investing and the prudent investor is prepared for both environments. A rational stock investor can make money in the market over the long term.
Follow this handy checklist that a stock investor should use before investing in the market.
1. Make sure that you have enough money
Fund your emergency savings account so that you have money in case of an emergency. You never know when you will need access to your cash and you don’t want to be forced to sell your investments to meet your liquidity needs. You would be surprised at the number of investors that are forced to liquidate their portfolios during bear markets to pay bills. Don’t let this happen to you. Only invest money that you can afford to go without for at least 5 years.
2. Create your investing strategy
Figure out what type of stock investor you are and which types of stocks best fit your risk level and return assumptions. Growth investors may look for stocks that are able to grow earnings at a much faster rate than competitors. Value investors will look for value stocks that are trading at a discounted level. Blended investors will look for both types of stocks. Long term investors will have a strategy that judges results over several years whereas short term traders will judge results over weeks and months.
3. Select a broker
You can buy stocks through a broker, direct stock purchase plan, mutual fund, index fund, retirement account, or dividend reinvestment plan. There are so many different options that you can select from. Discount brokers are often the best option for investors that want to build a stock portfolio because they offer low fee pricing that makes it easy for self directed investors to buy and sell a number of different assets. Find a broker that has a minimum investment amount that you can handle, a low fee structure, and has all of the investment choices that you need.
4. Research your investments
Once your brokerage account is open and funded, it’s time to start doing your research. You can use sites like Google Finance, Yahoo Finance, AOL Dailyfinance to look at the fundamentals of a company. All of these sites are free and offer a lot of useful information. Fundamental investors will need to look for specific criteria like P/E ratios, earnings growth, and long term debt. You can get a complete list by getting a free copy of the 10 Things To Look For When Buying A Stock.
5. Build a diversified stock portfolio
Constructing a diversified portfolio means that you should have a stock that covers each of the major industries. The reason that you want a diversified portfolio is because one sector can thrive while another struggles. For example, the consumer staples sector may thrive during an economic recession while a cyclical industry like construction will struggle.
You need a technology company, financial company, real estate company, consumer staple company, healthcare company, oil and gas company, and a retail company. The allocation of assets does not have to be equal however. You can however plunge more money into your favorite company and less into your least favorite companies.
I like your prioritization. An emergency fund is paramount, and since stocks can be volatile this investment should be separate, and secondary. Thanks Mark.
Thanks Hunter.
You forgot one. You need to read, read, and then read some more. Between step 1 and 2, insert “Before you put a single dollar into a brokerage account, read The Intelligent Investor. Then read it again to make sure you understand it.”
I agree with having an emergency savings account, you’ll never know when you’d need and run out of money. Only invest money you won’t be needing in the next 5 years. Five years is too long for most people, but for someone who knows the stock market, its a short time to gain much from your investment.
I also want to add diversification. It works best when you have a lot of money to invest. Don’t just put all your money into one account, or investing it in just one stock. If one loses, at least you still have other investments that are earning.
Also remember, when the stock market is down, it is the best time to buy stocks.
Great post, and I definitely second the need for an emergency fund. Some people suggest a year’s worth of expenses, and though that might be a little extreme you should definitely have a large spot of cash ready to go at a moment’s notice for any reason. For me personally, I like having 10% of my brokerage account value in free cash.