Things to consider before investing in the Stock Market.

The Stock Market is one of the best ways to make your money work for you. Some companies have seen their share prices rise to more than 1000% in the last 15 years, some even higher. Average annual returns for most blue chip companies range between 10-15% per annum which is higher than most asset classes in the market.

If you haven’t invested in the stock market yet, but are planning to, here are a few things you need to consider before doing so.

Objectives

You can’t just invest without having any reason why you’re doing it. You need to have a goal. Having a specific objective makes it easier to pick the right investment vehicles that will work for you. Your objectives and investment should be aligned. You can’t invest in short term instruments for long term needs, and vice versa. If you’re looking to build a college fund for your young kids, or maybe to buy a house 5-10 years from now, then the stock market can be a good investment because of the higher potential yield. If however you’re just trying to save money for a trip abroad in next two to three years, then don’t put your money in stocks.

Don’t invest in long term instruments for short term needs.

Knowledge

If you don’t understand how the stock market works, don’t invest. If you’re really keen on making money in the stock market then you need to make sure that you understand what you’re doing so that you will not be alarmed when the price goes down and lose sleep or sell at a loss because you panicked. The same goes for any investment vehicle you want to put your hard-earned money into. Learn before you Earn.

Training fees are a small price to pay compared to money lost due to ignorance.

Risk Tolerance

Investing ALWAYS involves a certain level of risk. The higher the risk, the higher the rate of return. Stock Market investing is highly risky, but at the same time the yield can be very rewarding as well. If the prospect of losing some of your capital does not scare you, then investing in equities or stocks is something you can try. But if seeing your portfolio go from positive to negative causes you to lose sleep, then it’s best that you avoid investing in equities and go for something less risky. What’s the point of investing money if you’ll end up with higher medical bills because of it, right? Health is Wealth.

Investing ALWAYS involves a certain level of risk. The higher the risk, the higher the rate of return.

Time frame

If you’re someone who’s only a few years shy from retirement, or if you’re planning to withdraw your investment after a couple of years, the stock market isn’t for you. Investing in the stock market is more profitable for those who remain invested (in good companies) for 5 years or more. Keep in mind that the market goes in cycles; Bull and Bear. Each cycle can go on for years. As of this writing, the PSEi has been in a deep downtrend. If you invested at the start of this year and planned to liquidate your shares by the end of this year, then you would be selling at a huge loss. On the other hand, if you bought shares of a good company at the beginning of 2014 and sold your shares last August of this year, you still would have sold at a profit in spite of the downtrend.

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”- Warren Buffet

Financial Capacity

If you have the extra cashflow, and you will not be needing the money you wish to put in stocks anytime soon- then go ahead. But if you’re still in debt, and you’re a bit tight on cash then it’s best that you stay away from the stock market for now. As a general rule of thumb, it’s highly recommended that you don’t start investing yet until your finances are in order. Although investing in the stock market doesn’t require millions or tens of thousands of pesos; depending on the shares you wish to buy; you still need to make sure that whatever you’re investing is just your excess cash. If your cashflow is negative, it’s best to start investing after your finances are in much better shape. Make sure first that you have a good cashflow, you have zero debts, you have an emergency fund, and that you’re properly insured before you start investing.

Only invest your excess cash. If your cashflow is negative, don’t put money in stocks.

With the local bourse currently in a downtrend, those who are new to stock market investing, or those who are planning to include stocks in their portfolio can’t be faulted for thinking twice about putting money in the stock market. After all, nobody wants to lose money, right?

What we need to understand however, is that economies, markets and businesses also go in cycles. Sometimes they’re up, and sometimes they’re down. It happens. As long as you’re invested in a GOOD company with a track record of earnings, then you need not worry about the price fluctuations. Take Jollibee (JFC) for example. In April of 2007, Jollibee’s share price was at 61/share and went all the way down to 32/share on July of the following year. Those who panicked sold their shares at a loss, but those who believed in Jollibee’s potential and bought more after the price went down definitely made a LOT of money after the price went up. Jollibee’s share price went up to a high of 305/share before going down to 247 as of this writing. That’s a 300% windfall from 61 all the way to 247!

When you buy shares of a company, you’re buying a piece of the company. You become one of the owners. So unless you’re sure that you’re buying shares of a company that’s making money, and will continue to make money, don’t buy a single share.

“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
Benjamin Graham, The Intelligent Investor

In summary, the stock market can be a great investment vehicle for someone who understands the risk, and is willing to put in the hours necessary to understand how it works. If your finances are doing well, you’re willing to take on the risk- then stocks can be an investment that you can add to your portfolio.

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