Here are some things you need to know before investing in stocks
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Young investors pile into stocks. Before you follow their lead, however, there are a few things you should do first.
Otherwise you could get burned.
“Sometimes the shiny item or stock that is flashed on screen or talked about on Twitter gets the most attention,” said Amy Richardson, certified financial planner at Schwab Intelligent Portfolios Premium.
“You have to think about it, is this the right investment for you?” She added. “It’s always about being informed and making sure that you do your research so that you are comfortable with the investment.”
For example, merchants who bought GameStop during the Reddit buying spree could have lost a ton of money depending on when they bought and sold. The video game retailer started the year below $ 20 per share and peaked at $ 483 on Jan. 28. It briefly fell below $ 50 in February and is now around $ 150 per share.
“Do I think it’s dangerous to invest based on what you read on social media?” Said Winnie Sun, co-founder and chief executive officer of Irvine, California-based Sun Group Wealth Partner. “It can be, but it doesn’t have to be a bad thing.”
Here are some things to consider before you start investing.
Make sure your finance house is fine
Make sure you are on the right path to financial wellbeing before buying any assets. That means knowing your short- and long-term goals, having a healthy emergency fund (experts generally suggest spending at least three to six months), and contributing to a retirement account.
If you have a 401 (k), you’re contributing at least enough to get the employer’s match, advised Richardson.
“Those contributions add up over time, and that power of compounding and tax deferral can be really, really powerful,” she said.
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For those who don’t have a 401 (k), whether it’s not offered through an employer or not yet employed, Richardson believes a Roth Individual Retirement Account is a good place to start. Because Roth IRAs have income limits, you may not be able to invest in one later in your career. Contributions are made after tax so you won’t be taxed if you withdraw money in retirement.
If you’re in debt, don’t keep investing, Sun suggests. That means debt of all kinds, whether it’s a large number of student loans or credit cards.
Choose investments wisely
To invest, create a wish list and write down why you want specific names. Do the research behind the stock and the industry you’re interested in, said Sun, a member of the CNBC Financial Advisor Council. Then you will learn about mutual funds and exchange-traded funds.
A mutual fund is a pool of money in which investors buy stocks. The money is invested in assets like stocks and bonds. An exchange traded fund, also a pool of investor money, generally follows an index like the Dow Jones Industrial Average or the Nasdaq 100.
“In this day and age, stocks are the celebrities of the day and mutual funds and ETFs are considered boring,” Sun said. “I like the idea of having a balance between the two.”
For example, she suggests maybe picking two stocks out of a list of six and then trying for the others to find a fund in the same industry or one that holds that particular stock.
Also, consider your risk tolerance, which means how comfortable you will be if the market falls.
“That should tell you how much you want to invest in stocks and how much you want to invest in a more conservative investment like a pension fund,” said Richardson.
Think long term to get the most out of your investments.
“Getting in and out of stocks has not proven to be profitable over time,” said Richardson. “It’s about staying in the market.”
Real money for play money
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