Things You Must Know Before Investing In The Stock Market

Investing in the stock market can be a great way to build wealth over time and outperform inflation.

You may know many people who have become wealthy by investing in the stock market, and you also want to start investing in the stock market to build wealth. But there are certain things that you should do and know about before investing in the stock market.

It has become easy to open an online brokerage account and start investing in the stock market. But that ease sometimes can be dangerous for people who do not know these things before investing in the stock market.

Most people start investing in the stock market and forget about what they need to know before investing in the stock market. It may lead you to lose a lot of money in the stock market because you make a mistake thinking that you can make millions and not know anything before investing in the stock market.

What is the stock market?

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), Which represent ownership claims on businesses. Wikipedia

Why is knowing these things are crucial for everyone investing or wanting to start investing in the stock market?

These will help you speed up your process to build wealth over time in the stock market and will help you learn from other investors' mistakes so you won't lose a lot of money to learn that lesson.

Learn everyday, but especially from the experiences of others. It’s cheaper! – John Bogle

So let's learn what you need to know before investing in the stock market.

1. Know your comfort zone in risk-taking

The point is to consider risk control, loss avoidance, at least as important as a return.”

Howard Marks

Most people start investing in the stock market without knowing how much risk they are comfortable taking.

So when they don't know their risk tolerance, they often make investments by taking too much risk, which they aren't comfortable with. These people sometimes won't sleep at night because they are thinking all time about their investment.

Knowing how much risk is comfortable for you is critical. It is crucial to know before investing in the stock market.

When you know how much risk you are comfortable taking. You won't worry about your investment all the time, and it won't wake you up at night.

First, know how much risk is not too much for you, and then decide how much you want to invest in blue-chip and growth stocks.

If you are 20 years old, invest 20% of your money in a blue-chip stock or any other safer investment, Which is stable or may give you dividends over time.

You can adjust your portfolio and lessen your exposure to riskier investments as you age.

It is a good strategy for you to adjust your risk tolerance based on your age because most people can take more risks when they are younger.

But when people get 50 or 60, they want a stable and less risky investment that provides dividends over time.

You may want a stable and less risky investment even when you are younger. That's ok.

Everyone has different risk tolerance and knowing how much risk is not too much for you can help you build wealth in the long term.

2. Create an emergency fund

You have to create an emergency fund before investing in the stock market.

When people are in financial difficulty, Some people make mistakes by selling their long-term investments to get money. But this will stop you from building wealth in the stock market.

If you have a savings account in a bank, then it's ok to take money from it for difficult times. But the recommended thing to do is to create an emergency fund where you put six months or a year of your income.

Creating an emergency fund will prevent you from cashing out your Long-term investment because you already have an emergency fund that can handle when a financial problem arises.

Cashing out your long-term investment to fix your current financial problem will slow down your process to build wealth.

So make sure to create an emergency fund that will help on your rainy day rather than cashing out your long-term investment.

Most people make a mistake by instantly starting investing in the stock market and don't create their emergency fund, thinking that nothing happened.

But when a financial problem arises, they have to sell their investment to pay interest on their mortgage or pay for other extra expenses.

Before investing in the stock market, you should set up your emergency fund so you won't have to sell your investment to solve your financial problem.

3. Mix up your investment portfolio with different assets

Before investing in the stock market, you should mix your investment portfolio with different assets, such as real estate.

If you don't have money to invest in real estate, you can invest in REITs in the financial market that can provide you value when real estate markets go up.

Investing only in the stock market isn't a wise way to build wealth because you never know when the stock market goes down in the short term, you may lose a lot of opportunities by not investing in other assets that go up when the market are down.

The main goal of mixing your investment portfolio with a different type of asset is not to get too dependent on the stock market and invest in other assets that will increase in value when the stock market won't perform well.

Mixing up your investment portfolio will also help you diversify your risk and return with different assets. So you aren't only dependent on the stock market to build your great wealth.

Mixing up your investment with something that may increase in value when the stock market won't perform well can be a great way to make more return on your alternative assets.

Some of the alternative assets that are great to hold in your investment other than stocks are.

• REITs
• Government bonds
• Gold
• Real estate
• Precious Metals

4. Avoid short-term trading

I am sure you have seen ads about how easy it is to make money by short-term trading. But the truth is that around 90% of intraday traders lose money in intraday trading.

The success rate is only 10 percent, and they also won't make a profit in every trade.

When you do short-term trading, You very likely will lose your money because no one on earth has predicted the stock market in the short term.

So the people who are telling in ads how you can predict where the market will go in the short term just by purchasing their course are probably lying.

These people are selling courses to teach people how to predict market movements in the short term. If they know where the market will go, they probably won't sell a course to earn money and probably be billionaires.

The main reason to avoid short-term trading is that you very likely lose your money and the other reason is that taxes on trading are probably higher than investing longer than a year.

You also get a tax advantage by holding your position longer than a year.

You can see how short-term trading can lose your hard-earned money. So always avoid short-term trading and focus on investing in the stock market for the long run because that helps you build real wealth in the long term.

“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”

Peter Lynch

5. Never listen to tips that other people give you about stock

You may get stock tips from your neighbor, friend, and family members who will tell you that certain stocks will go up as if they can predict the future.

They get these stock tips from someone and tell you about that stock. Some people mistakenly buy it because they are neighbors or friends tell them that stock will only go up.

Whenever somebody tells you that a stock will go up in value, ask people why they tell you and think based on what assessment he is saying to you about that stock.

Most people who research a stock will not tell everybody that it will go up. Instead, the people who give stock tips to everybody are the ones who don't do any assessments on stock and just say based on other people's opinions. They think stocks will go up because other people say so.

If you want to lose your money in the stock market, invest based on what stock tips you get from neighbors, family members, and friends. It can very likely help you lose your money in the stock market.

You have to know before investing in the stock market, and dont make any decision about a stock based on other people's opinions.

You have to focus on analyzing a stock, then decide whether to buy it or not.

Make sure you won't listen to your neighbor telling you how a stock will only go up, ignore this type of bad advice.

6. Never invest in something you don't understand

“Never invest in a business you cannot understand.”

Warren Buffett

You have to know your circle of competence. If you invest in a stock without knowing about the company, you likely will lose your investment.

Most people invest in companies that they don't understand and don't look at a company they do understand.

You can't understand every company listed on the stock market. Even great investors like Buffet won't understand every company on the market. But he gets so successful in investing because he only invests in companies he can understand.

You don't have to understand every company on the stock market to make money. You only need to know some companies. Which you can understand and invest in it.

Never invest in something because on social media, someone said, It will go up. Instead, do your analysis and then make your investing decision. It is a crucial lesson to learn before investing in the stock market.

7. Stocks won't make you overnight a Millionaire

Although, Stocks can make you a millionaire over time in the long term.

But some people think that if they invest money in a stock market, then in a year or so, they can be millionaires. If you already have 700k USD or more invested in the stock market. You can be millionaires in a year or so.

But generally, when people start investing in the stock market, They don't invest large amounts in the stock market. You have to be realistic with your investment strategy and think long-term.

There is a chance that you can be a millionaire if you invest a portion of your income in a stock market and only invest in something you understand.

Although the more money you invest, the faster the process for you to make a million dollars.

Assuming you are investing a little bit of your income into the stock market, it will take time to make a million dollars, probably around 10 or 20 years or so, depending on your returns and how much money you invest.

The stock market won't make you overnight a millionaire. But there is a chance that you can make a million dollars.

Make sure you don't make a mistake thinking that you are a genius and can make a million dollars overnight because it is not a realistic investment goal.

8. Avoid leverage

Most people use leverage to multiply their profits and invest money that they don't have.

But the problem with leverage is you not only maximize your profit. But also maximize your losses. It's a double-edged sword.

When you invest your money in the stock market, Even if a stock goes to 0, you only lose the amount you invested. But with leverage, you won't only lose your investment. You also have to pay interest and the money you borrow as well.

Most people probably use leverage, Thinking they can make a lot of money by investing money they don't have. Instead, they mostly maximize their losses, not profit.

A beginner, Who wants to invest in the stock market for the long term should not use leverage because even the most advanced investors lose money by leveraging.

You are a beginner. You have a higher likelihood of losing all of your money with leverage, and you have to pay more money to cover your losses because you have to pay the amount you borrow with interest.

Avoid leverage as much as you can. It isn't for beginners at all. Even Professionals carefully use leveraging.

"If you don't have leverage, you don't get in trouble. That's the only way a smart person can go broke, basically. And I've always said, 'If you're smart, you don't need it; and if you're dumb, you shouldn't be using it."

Warren Buffett

9. Don't let emotion guide your investing decision

Sometimes people buy a company because they feel good about the company.

In investing, never let emotions guide your investment decision. It will be a disaster. You lose a lot of money just because of your emotion.

Most people sell when a stock goes down because their emotion tells them this stock will only go down, not up. So they let their emotions guide their investment and sell a stock. Which in a few days rises again, and then they regret why they sell it on losses.

If you can't control your emotions when a stock goes down, You shouldn't invest your money and let professionals invest your money.

Sometimes, when stocks get overvalued, people think not rationally about what the company is worth. Instead, They unconsciously believe this Stock will only go up. So they don't sell when it gets overvalued and, a few days later. It goes down. Then they regret why they don't sell it at that time.

You have to make your investment decision based on rationality, not emotions. Before investing in the stock market, you should know that you have to make an investment decision only on rationality, not on feelings. The earlier you understand, the more likely you create wealth in the long term.

“The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

Benjamin Graham

Conclusion

These are the crucial things you should know before investing in the stock market.

If you know what you are doing, you can make a lot of money in the stock market.

When you don't know anything about the stock market and don't learn these things before investing in the stock market, You likely will make losses on your investment.

Make sure you learn these things before investing in the stock market. So you can increase your chances to create wealth over time.

Please note this content is only for informational purposes.