3 Questions to Ask Before You Invest in Stocks
If you feel uncomfortable every time stock prices fluctuate wildly, or if you feel distressed seeing your portfolio has lost 10% in value, or if you have the urge to sell just because everyone is selling, you probably should review the basics of investing.
Why? Because stock market investing may not be for you.
You should know that the stock market periodically suffers from a bloodbath, with market reversals occurring after periods of bullish trading.
If you want to assess if you are fit to invest in stocks, ask yourself these three (3) questions.
1. What’s my investment objective?
You must first assess what your investment objectives are. Determining the reason why you’re investing in the first place can properly match you to the asset you should be investing in.
The investment objective may be any of the following:
1. Capital Preservation. The most conservative strategy, the primary goal of “capital preservation” is to prevent risk of loss.
2. Current Income. “Current income” is the strategy of getting the fastest return on one’s investment. The return does not have to be extremely high; just enough to produce a level of income that can cover one’s living expenses on a regular basis.
3. Capital Appreciation. If your goal is to grow capital, this can be described as “capital appreciation”. The ultimate goal of capital appreciation is to produce a high level of return but do note that this also entails higher risk of loss.
4. Total Return. “Total return” is the goal of growing your capital through both capital appreciation and reinvestment of that appreciation.
You should see by now that if “#1 – Capital Preservation” is your investment goal, stock market investing may not be for you. You may choose to invest in stocks if your goal is Current Income, Total Return or Capital Appreciation.
2. What investment options are appropriate to my investment objective?
If your investment objective is capital preservation, ideal investment options could be time deposits, low-yielding bonds, money market funds, and other similar assets with low risk. These assets are relatively safe and can help protect one’s capital. Stocks, with their inherent risky characteristic, may not be for you since losses are possible in stock investing.
If your goal is current income, stocks, especially dividend-paying stocks, might be for you. The dividend payments from these stocks can help cover your living expenses on a regular basis.
(A listing of Philippine Stock Exchange index (PSEi) stocks and their dividend payout ratios are in the article List of Dividend Paying Stocks in the Philippines.)
If your goal is Capital Appreciation or Total Return, stocks in general may be the appropriate investment option for you. They provide a high level of return that usually exceed that of the inflation rate and may, indeed, grow one’s capital exponentially.
3. What’s my tolerance for risk or losses?
Basically, you have to assess if you have a high tolerance for losses. If you do not want to experience any loss of capital, stocks may not be the appropriate investment for you.
Stocks are high-risk, high-yield investment instruments. This means that although there is potentially high level of income associated with stock investing, there is also the risk of capital loss.
In stock investing, there is no guarantee that your capital will be protected and there is always the possibility of loss of money.
So to reiterate: If you feel uncomfortable every time stock market prices fluctuate wildly, or if you feel distressed seeing your portfolio has already lost 10% in value, or if you have the urge to sell just because everyone is selling, you probably need to review the basics of investing.
Hope that helps. Happy smart investing!
Read these other related, useful articles:
- The Emotional Cycle of Stock Investing
- Primer and Tutorial on Stock Trading
- FREE Stock Picks, Target Prices and Broker Recommendations
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