Best Ways to Invest Money: Nailing the Stock Market
Best Ways to Invest Money: Nailing the Stock Market
To many, the word investment has a positive connotation. Generally speaking, you will get something in return when you hear this – a profit-generating asset. I get it. You want to make money or gain something out of an investment.
Despite this, many are still suffering massive losses when investing. What they initially thought would yield profit became more like a gamble. Unfortunate events happen when investors do not carefully comprehend and review their financial situation.
It would help reassess whether or not stocks are appropriate in your finances. Investing in the stock market entails being responsible. You have to constantly evaluate the company’s financial statements and check both the internal and external factors affecting the business. There are several aspects to consider in tracking the progress and pitfalls of the stock you chose.
If you want to enter and be successful in the stock market, equilibrium is vital. Do not make stocks the whole portion of your income nor too little for it to yield any valuable return. Make it one part of your diversified portfolio – not all.
Consider the SSS before investing in the stock market – no, not Social Security System. SSS, in this context, stands for:
Square One
This is the beginning of a budding stock investment. You should assess what you own and owe by creating a balance sheet.
A balance sheet follows a simple equation – total assets - total liabilities = equity. Your equity represents your net worth. Knowing your financial value will help you understand if investing in stocks is a sound decision.
You can either go with the traditional pen and paper or make a Microsoft Excel spreadsheet in constructing a balance sheet. It would be advisable to compile all your financial records to document your transactions.
Afterward, categorize and record each of those on your paper or spreadsheet. Distinguish whether it is an asset or a liability. Then, manually calculate or let the software formula compute your net worth.
Aside from a balance sheet, you may also use an income statement. It records your total income and expenses. If the income is more than your expense, you are doing well financially. Meanwhile, if what you’re spending is more significant than what you receive, you have a negative balance. It may reflect your overspending habits.
In developing a starting point, there are stages you need to take; namely:
1. Setting Up an Emergency Fund
Having an estimated store of cash for the next six months will ensure that you have something to draw from when an emergency occurs. It may be unemployment or a medical condition – whichever it is; an emergency fund will help mitigate the loss.
Store your cash reserve in a bank account. This way, it earned interest and was kept safe. An emergency fund will serve as your insurance when all else fails.
If you prioritize stocks over setting up an emergency account, you are vulnerable to financial loss. Stock investments may yield high returns; however, they are also high-risk.
Therefore, if you rely on it and the market fails, you may tank all your accounts. So, make sure that you have set aside guaranteed funding for unexpected happenings.
2. Tallying Your Assets from the Most to Less Liquid
An easily liquidated asset means that it can be quickly converted into cash. You have to secure these liquid assets so you know which one to turn to when you have a current obligation you need to fulfill.
Assets should be listed down from liquid to illiquid in your balance sheet. These are usually current assets down to non-current assets. Listing in terms of liquidity will give a direct and plain record of your funds.
If you are skint on cash, check the topmost part of the asset section in your balance sheet. That portion will help you identify where you can immediately get money or cash if you need to pay for something.
3. Enumerating Your Financial Obligations
Financial obligations or liabilities are those that you must pay. It may be your loans or a credit card bill. It is money that you owe to someone or an institution.
If you are not aware of your debts, you are more likely to overspend because you think that you still have a lot left of your income when, in fact, you haven’t paid your dues yet.
4. Computing Your Wealth
Wealth, in here, means your net worth. It is the result of deducting your liabilities from your assets. Knowing your total equity will give you a clear picture of whether you are capable enough of investing in the stock market and bearing the risks.
5. Dissecting Your Balance Sheet
Scrutinize the components in your balance sheet. If you have an unfavorable net worth, meaning your liabilities are more than your assets, check what you can cut back or how you can increase your wealth.
Stock Funding
Before you can buy shares of stocks, you need money. So, review how you will fund this investment. In generating financing for your stocks, you may consider two (2) things: reapportion and cash flow.
1. Reapportion
Go over your assets, including your investments. Vend those that are not useful or profitable anymore. Use the cash you would generate from the sale to invest efficiently.
Efficient investments are those that would yield valuable gain or return. However, if you cannot fully apprehend your investment portfolio, seek assistance from a financial advisor.
These people are knowledgeable enough to help you deduce which assets or investments to retain and which to sell.
2. Cash Flow
Cash flow means your financial inflows and outflows – income and expenses. Calculate the net of what goes in and out, and if it is positive, you are one step closer to investing in the stock market.
On the other hand, if it is negative, you have to find ways to reverse this. Negligence may result in your accounts or wealth running dry.
Setting Goals
Do not buy stocks for the sake of having investments. Instead, use it to meet a purpose or an end goal. Successful returns on stock investments may be one of your goals. But think of why you want returns.
It may be to have an additional income. It may be to fund a retirement account. Ensure that you have something you’re looking forward to beyond significant stock profits.
Categorize your goals into three types: long-term and intermediate.
1. Long-Term
This gives you a longer time horizon. It is a goal that you wish to achieve several years from now. Stocks prices are volatile. So, generally, investing in it is suitable for goals as such.
2. Intermediate
Goals falling under this category are those you wish to accomplish within five years to two years. When you want to obtain intermediate goals, consider more conservative stocks.