Post Brexit: What to Consider Before Investing in the Stock Market
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Date: June 30, 2016
If you've put a little money aside and you're looking to make it grow, your thoughts might turn to investing in the stock market. Maybe you woke up one morning realizing that retirement is a bit closer than you thought so you want to bulk up your savings. Maybe you'd just like to have a little larger nest egg than you currently enjoy. Even if last week's Brexit vote may make you hesitant to invest, stocks can be a boon if you handle the situation right and go in with your eyes wide open.
How Stocks Work
In the most basic terms, when you buy stock in a company, you buy a piece of the enterprise -- a share. Businesses sell shares of their enterprises to raise money that goes toward operating costs. Technically, buying a share makes you a co-owner, but you generally do not have any say in day-to-day operations of the business. Your share gives you a claim to a portion of the company's earnings - but you're also at risk for its losses in proportion to the number of shares you own.
Your Tolerance for Risk
On the surface, buying shares of a company might sound like a win-win situation because someone else does all the work. But as the economy fluctuates, so, too, will the value of the company you've invested in. By extension, the value of your stock will go up or down. You could potentially lose money, particularly if you have to cash in at a time when the market is down, because you can't get those losses back unless you stay invested. Stocks are not insured by the federal government like savings accounts and certificates of deposits are. Before you invest, make an honest assessment of how willing and able you are to risk losing your money. If this would be a catastrophic event, you might want to look for a safer investment vehicle. Ideally, you'll have another nest egg tucked aside for emergencies so you won't have to sell your stock at an inopportune time when its value is depressed.
Issues of Timing
Another important factor is how soon you want or need to see a return on your investment. "The first consideration is your time horizon," advises John W. Risley, Jr., president of L.O. Thomas and Company, Inc. in Linwood, New Jersey. "Patience is key for successful investing." If you're saving for retirement and you're 35, you have plenty of time, particularly if your temperament and your savings allow you to take a deep breath and ride out dips in the economy and the stocks' performance. But if you're 55, retirement age is much more imminent, so you may not have this luxury. As a general rule, the longer you intend to invest, the safer you are with riskier stocks -- those that will typically earn the most money.
Be Wary of Scams
You may not want to jump into the stock market with both feet and without expert guidance. "Seek advice to match the appropriate investment with your risk tolerance and goals," Risley says. Keep in mind that -- just like other industries -- the stock market has its share of unscrupulous individuals attempting to do business. "Brokers" may reach out to you instead of the other way around, urging you to invest in a company that's absolutely sure to skyrocket tomorrow because of recent developments. These individuals read the papers and watch the news just like you do and may have no expert knowledge at all or -- even worse -- they may not even be brokers or investment firms. If you know friends or family members who invest, speak with them for recommendations for good and reputable brokers. You can also contact the National Association of Securities Dealers to check on a broker or firm you're considering investing with.