What to know before investing in stocks?

You have probably heard a lot about the diversification of your portfolio if you are reading this article or have at least thought about making a retirement plan that consists of passive income. Passive income doesn’t come from nowhere, it requires years of thoughtful investments and good financial decisions. One of the ways to make an investment is to buy stocks. Why buy stocks? Well, investing in the stock market nets an average return of 7% each year after inflation, which is awesome for long term goals. Thinking of purchasing stocks?

Here is everything to know about stocks before you can decide if buying the stocks is a good idea.

1. Buying stocks is one of the ways to make an investment

Thinking of diversifying your portfolio? Why not buy stocks then? Depending on your profile as an investor (how much money you are willing to invest, for how long, what risks are you willing to take, etc.), you can definitely take advantage of the stock market and make good profits. However, you don’t need to get fixated on the idea of buying stocks, as there are so many more other ways to make investments. Also, consider index funds as they are pretty easy to operate and less risky.

2. Investing in stocks is generally risky

Keep in mind that although that 7% average annual return on stocks sounds appealing, stocks tend to be pretty risky, especially in the short-run. The stock market can be pretty unstable and go from bull to bear in days. Long term stock market investments are usually more stable, however, you don’t have a guarantee anyway, nothing is a sure bet. Some years may be more successful for the stock market than others and you don’t really know what year it will be when you need your money back.

3. Use a broker or brokerage websites to make investments

While most investors usually use a brokerage firm to deal with their financial portfolio, keep in mind that such firms charge a fee for their services. Nowadays, you can use brokerage services through a brokerage website. You will need to open an account and deposit money, then your broker will be able to purchase a certain amount of stock for you.

4. Not all brokerages are the same

You know that there are companies of different strengths and sizes. The same thing applies to brokerage firms. You should choose a brokerage for your money, depending on your needs, wants and abilities. Different brokerages charge differently but they are also different towards their clients. Decide on your investment strategies and only then choose a brokerage.

5. Don’t invest in just one stock

Diversification in your portfolio is very important. Even if some companies fail to meet your expectations, others will exceed making your average return pretty impressive. Although investing all your money in one promising young company might be tempting, just don’t.

6. Make sure that you remember about taxes when investing in stocks

Don’t worry about it though, when investing in a retirement plan, you will only be paying the regular income tax and tax-deferred investments. Your brokerage will usually help you set it all straight.