5 Questions You Should Ask Yourself Before Investing in Stocks Online

 5 Questions You Should Ask Yourself Before Investing in Stocks Online

Are you looking to build wealth and are considering investing in the stock market?

After all, over the last few months, individual investors across the globe have experienced massive market gains, especially thanks to big tech stocks.

The trend has been fueled by record-low interest rates, making investing in the stock market more appealing than keeping money in a savings account. It has also been underpinned by the rise of online trading platforms, making investing at the touch of a button possible. What’s more, a high number of financial influencers and Youtubers have been sharing their mind-boggling profits online, enticing others to follow their lead in a bid to reach financial freedom.  

One thing is for certain: regardless of your age and budget, now is the best time to invest. 

However, before dipping your toes into the stock market, you’ll need to ask yourself a few important questions. 

So, to assist you, we’ll briefly explain what the stock market is and how it works below, before outlining these crucial questions. 

Definition of the Stock Market

The stock market is a global financial market where individuals, institutions, organizations, and companies trade financial securities daily. These securities refer to rights to financial assets such as shares, bonds, exchange-traded funds (ETFs), or even currencies. 

A share is a portion of ownership in a company. When you buy shares, you automatically become a shareholder, meaning you own a small portion of this company. 

Companies sell their shares to public investors through the stock market to raise capital and fund their growth and expansion. 

An ETF is a basket of securities such as shares, stocks, or bonds that trades like a stock. Beginners usually prefer them as they allow investors to diversify their investments and balance the risk.

How to Invest in the Stock Market?

Even though you can use a full-service stockbroker to invest your money for you, the easiest way to get started is by using an online stockbroker. 

Some of the best online brokers for beginners include:

● TD Ameritrade

● E*TRADE

● Merrill Edge

● Fidelity

● Charles Schwab

What’s Your Investment Objective?

The very first question you should ask yourself before investing in stocks is what your investment objective is. 

There are three types of investment objectives:

- Safety

- Income

- Growth

Even though your portfolio should hold securities reflecting a mix of these three objectives to help balance the risk, one will be preeminent based on your life circumstances and financial goals. 

For instance, if you’re in your early twenties and want to reach financial freedom in your thirties, growth shares should make up a bigger portion of your portfolio than safety shares. 

What’s Your Budget? 

Investing in stocks online has become increasingly popular because many online brokers require a low minimum amount to get started. 

This means that you don’t need a lot of money to start trading and can still benefit from the power of compounding. Indeed, when you invest in shares, you’ll make a return either in the form of dividends or capital gains. When reinvesting this profit into the stock market, you’ll generate additional earnings on the previous earnings, gradually increasing your wealth. 

 

However, when defining how much money to invest you should always consider diversifying your investments to reduce the risk. This means that you should keep some cash in your savings account in case of emergency.

As a general rule of thumb, you should save at least 20% of your income every month and invest between 10% and 15% in the stock market or any other growth asset. 

Do You Understand Your Investment? 

Investing requires time, patience, but, most importantly, research. Even though watching videos on YouTube can be a great starting point to get some inspiration regarding stocks to invest in, you still need to do your due diligence before investing in a stock. This means learning how to analyze the fundamentals of a company and assessing its future potential. 

Some of the key things you need to consider include:

- Key ratios

- What the business does

- The economic model

- The economic moat of the company (competitive advantage and ability to maintain it over time)

- What industry does the company operate in, and the future potential 

Only then will you be able to make an informed decision and reduce your risk (even though investing in the stock market always carries a risk).

How Much Do You Expect to Make on This Investment? 

Before investing in the stock market, you need to ask yourself how much you expect to make. And to assess the performance of your investment, you’ll need to calculate your potential return on investment (ROI) using a simple method. 

The ROI is a ratio between a net income and an investment, used to assess this investment’s profitability.

How to calculate ROI?

ROI is calculated by subtracting the initial value of the investment from the final value of the investment. You’ll then need to divide this new number by the investment cost and, finally, multiply it by 100. 

For instance, say you buy $1000 worth of shares in a company. You sell them three years later for $1,200. 

1,200 -1000 = $200

200/1000 = 0.2

0.2 x 100 = 20%

Your ROI is 20%

Now, to give you an idea, the average return on the stock market over the last 20 years was 10%. However, you’ll find disparities between securities such as small-cap stocks (11.9%), government bonds (5%), and large-cap stocks (10%). 

So if you invest in large caps and expect to make a 30% ROI, you’ll need to ask yourself whether this is a realistic outcome to hope for.

How Much Does it Cost to Invest? 

As mentioned before, the rise of online trading platforms such as eToro, Tastyworks,  Ameritrade, Fidelity has made it easier for beginners to dip their toes into the stock market. 

Some of them, like eToro, have attractive offers with free account opening, no commission fees, and no management fees. However, they can charge other fees. eToro, for instance, charges you every time you withdraw money from your trading account (5$) or if you are inactive for 12 months ($10 a month after twelve months of no login activity). 

So, make sure to do your due diligence when it comes to the fee structure and read the fine print to avoid bad surprises.

We hope this article has shed some light on the key things you need to consider before investing in stocks online. Have you already started investing? If so, we’d love to read about your experience and what criteria you use to pick a stock in the comment section below!