Should I Buy Stocks?

So you’ve learned a little about stocks and wondered if you should jump in and buy some shares. Before you go and dump your life savings into the stock market hoping to strike it rich, let’s talk about some things to consider ensuring our investment strategies match our financial goals.

What are you trying to do?

Many people think the stock market is an easy way to get rich or to create passive income. While sometimes this is true, the opposite is true way more often. There is a saying in stock trading that goes “Bears make money, bulls make money, but pigs get slaughtered”. Understanding a couple of things is important before you start dumping money into the market. What is your risk tolerance? How will you react if your portfolio drops 10% in a day… Will you panic and sell, or will you ride it out? How long are you willing to keep your money in the market? Are you trying to save for retirement or looking to spend money on a new car? These should be answered before you start putting money into the market.

Do you have extra money to buy stocks?

You are probably here because you can pay your bills consistently and are starting to have a little extra check at the end of your month. While this is a great place to be financially, it does not mean you are ready to start buying stocks. Consider the following prior to your first purchase: Have you matched all employer programs (401k, stock plans, etc.)? Do you have a safety net for unexpected expenses (some say you should have up to 6 months’ worth of expenses saved up)? Stocks should be one of the last things you start to dabble in after you have taken advantage of other programs and already have a decent-sized nest egg. Until you know what you are doing, never buy more in stocks than you would be willing to lose.

Are there alternatives I should consider besides individual stocks?

Whenever you invest money there is usually a correlation between the risk you take and the potential reward. Stocks are typically rated as a higher risk as well as potentially higher reward type of investment. Perhaps you are not ready to jump into it just yet. There are a couple of other investments you could try. You could buy an ETF (Exchange-traded fund) such as VOO or SPY which is a fund that owns multiple different companies and therefore less likely to have big swings up or down. You could also look at things like bonds which are loans you give to the government or corporations in exchange for interest once paid back (unlike stocks, bonds do not give you ownership of a company). You can also look at CDs (certificates of deposit) which will pay you out an agreed-upon rate depending on the amount and time you agree to keep the money with that bank. While no investment is without risk completely, these options are generally less risky than buying individual stocks and should be considered as part of your overall portfolio depending on your investment goals.