A lot of people are rightly nervous about investing in stocks. Popular culture has succeeded in convincing people that you are likely to lose all your money with this investment method. Is there any truth to this? Well, like most things in life, the answer isn’t always straightforward.
Investing in stocks can come with risks, but it also comes with great returns. Today, over 61% of Americans currently invest in some form of stocks, be it through individual stocks or self-directed 401ks. This percentage has been steadily rising ever since the financial crisis of 2007 – 2008.
If you are unsure about the feasibility of stock investments in the short and long term, read on.
Why Choose Stocks as an Investment Option?
Investing in stocks is a great option for many people due to the range of needs they serve. Once you have a clear investment goal, you can find stocks that are suitable for any need. Investors these days are worried about economic upheavals and fear that recessions can ruin their investments.
It’s not hard to see why. According to ValueTrend, we are already seeing big-box retail chains start to close. Economists have also been warning of an impending recession sometime in the near future.
When things appear uncertain like this, it is natural to worry about the reliability of stocks as an investment. Thankfully, there are a number of recession-proof stocks out there that are quite resilient. But that is not the point. The important thing to remember about stocks is that they give you a lot of flexibility, depending on your needs.
If you want to invest in a nice nest egg, that is possible. Similarly, if you are after short-term gains, there are many options available to you.
Stocks are known for their high returns and impressive appreciation over time. They have historically outperformed more common investments like bonds and savings accounts. This makes them an investment option you shouldn’t overlook.
Considerations for Long-term Stocks
Regardless of your investment goals, you should always be doing sufficient research. When it comes to long-term stock investments, there are a number of areas that you should be looking into. Let’s look at some of them below.
1. Risk tolerance
Due to their high returns, stocks are naturally more risky than the ‘safer’ options out there. Before putting money into your long-term investment goals, sit down and ask yourself what your tolerance is. Think back on your previous investment experiences.
How did you react when you lost money? Can you make a clear distinction between your risk capacity and your risk preference? A lot of investors confuse the two, but you need to objectively know what your risk capacity is.
You can do this by making an objective assessment of your income, assets, and obligations. Remember, risk capacity and preference are not static. They change with time, so it’s never a good idea to make an investment decision when you are not confident.
2. Hidden costs and fees
Additional fees can be an unexpected and frustrating dynamic to deal with. New investors tend to gloss over this aspect. These same investors find themselves paying more than they are comfortable with on extra costs very quickly. This is money that isn’t going toward your investments.
You might be shocked at how many fees you can get hit by. Advisory fees, margin interest, DRIP fees, account fees, trading costs, and load fees are a few. In addition to that, you also have brokerage commissions and management fees. Do your research, and don’t get locked into making your broker rich.
Considerations for Short-Term Stocks
Short-term investments are a little easier for new investors. However, they can be extremely volatile. This isn’t always a bad thing, though. Dealing with volatility can prepare you for how fickle the market can sometimes be.
Even here, risk tolerance and hidden fees are important considerations; however, there are some unique aspects to look into.
1. Liquidity constraints
Inexperienced investors should ideally focus on stocks with higher trading volumes and more liquidity. Why? This is because they usually have narrower bid-ask spreads and lower slippage. This makes it easier to execute trades. Slippage refers to when the price of a trade ends up being different than the price when the order was placed.
2. Overtrading issues
If your goals are more short-term, one issue you might run into is over-trading. It can be tempting to excessively buy and sell stocks for easy profits. While it can be profitable, it can also be extremely stressful. There’s also a good chance that you end up depleting your trading capital. That wouldn’t be a great start to your stock investment journey.
Conclusion
If you decide to choose stocks as an investment route, it should not be the only route you go. Ensure that you are diversifying your investments in a manner that you aren’t caught with all your eggs in one basket.
The temptation to stick all your capital in high-risk, high-return investments is great. If you aren’t prepared to deal with big losses, think twice. The stock market isn’t going anywhere. You can always invest in the future after learning more and gaining valuable experience.