Things to Know Before Considering Investing in Stocks

The stock market has always been the most popular destination for aspiring investors. Even the experienced investors are mainly focused on stocks due to their benefits and their potential for yielding a substantial return on investment (ROI). But what does investing in stocks really mean? Simply put, by purchasing a share of some company’s stocks, you’re purchasing a small percentage of their entire assets. You can sell or buy more stocks when the price is right or hold on to them, in order to enjoy the income from dividends.

Either way, stock investments are a good opportunity to gain profits from the money you have saved up and currently have no need for. However, even though the stock market is highly regulated, it’s important to understand that every investment is a risk. In other words, stock prices are evaluated based on a company’s performance. If you don’t know what you’re doing, you might lose your entire investment before you even realize your own mistake. With that in mind, here are a few things to know before considering investing in stocks.

Consider diversification

As mentioned before, every investment is a risk, especially if you focus only on a single investment method, such as stocks. Investors suggest that by diversifying your investment portfolio, you can minimize the risk of losses. For example, if you suffer a loss from stock price decrease, you can balance it out from other investment assets.

Diversification means investing in various stocks as well as ETFs (Exchange-Traded Funds), bonds and mutual funds or investing in alternative methods, such as gold, real estate and so on. However, if you want to stick to stocks, you should know that you have options available to you that will help hedge risks and insure stock losses. These options are also called stock options, specifically, call and put options. Options are contracts between two parties on the stock market, so it’s advised that you do not engage in such activities without consulting a lawyer first.

Consider taxes

Taxation laws should always be monitored by investors. Taxes can influence your investment decisions in many ways. For example, after the “Tax Cuts and Jobs Act” has been signed in the U.S., the taxes for large companies went down from 28% to 21%. The same act affected small companies reducing their taxation from 32% to 21% as well. This change made small cap stocks a good investment opportunity. However, it’s important not to solely focus on how taxes affect stock prices but how they affect your gains as well.

For example, if you receive dividend income from your stock investments, you must pay income tax that is oftentimes 15% but it’s subject to change. In addition, taxes affect selling stocks for a profit or loss. If you hold on to your stock for more than a year, for example, your incomes are taxed at a long-term capital gains tax rate. That’s why it’s important to consult with an advisor, in order to understand at which capital gains tax rate your incomes or losses are taxed.

Understand the rules and regulations

The stock market is highly regulated, which means any wrongdoings or misconduct won’t go unpunished. The stock market is regulated by the Securities and Exchange Commission (SEC) in the U.S. SEC is a government agency whose task is overseeing and enforcing rules and regulations regarding the stock market laws. Each country has their own government agency representative to help regulate the market, such as the FCA (Financial Conduct Authority) in the U.K. or the Australian Securities and Investment Commission (ASIC) in Australia.

The SEC is also in charge of publishing mandatory financial disclosures regarding corporations. Moreover, they investigate criminal behavior such as insider trading, spreading of false information, accounting frauds, manipulation of the market and so on. That being said, it’s important to familiarize yourself with any laws, rules and regulations regarding the stock exchange in your country of origin, in order to avoid misunderstandings or inconveniences.

Be mindful of the influence

Investors are prone to following what the others are doing, especially new investors on the stock market. The fact of the matter is that each investor has a unique strategy they’re following. That means that you shouldn’t copy what others are doing or where they’re placing their investments. For example, following the trends from newsletters or investing where everyone else is may mislead you to make a mistake. Instead, try to follow the accuracy of stock prices.

As a matter of fact, stocks have actual value but they oftentimes vary in accuracy. As mentioned before, stocks are evaluated based on a company’s performance on the market and prices are bound to rise or drop based on estimates and future projections of that company’s performance. However, at any moment, stocks are worth the present value of the future cash flow their holders will receive. Therefore, trade based only on actionable information you can obtain, instead of risking your investment based on a hunch.

 

The stock market presents investors with the opportunity to maximize their ROI for long-term investments. However, the stock market holds a significant risk, especially for those that are unfamiliar with how the market works. That’s why it’s important to consider important factors before you start investing in stocks.