Have you ever wondered about investing in the stock market but were hesitant to give it a try? Maybe you’ve only recently accumulated enough extra money to consider investing. In either case, there are a few preliminary steps to take before you enter the market. The Pennsylvania Institute of Certified Public Accountants (PICPA) offers five tips to help you get started.
Understand the Basics
When you buy a share of company stock, you’re getting a small part of the ownership of that company. The price of the share is based on a variety of factors that reflect the market’s perceived value of the company, including its current earnings and future prospects. But that’s not all. The price of a stock can be driven by fluctuations in the economy, the industry that the company is in, and the overall stock market.
Decide What to Buy
Before buying a stock, investigate the company to decide if you think it’s a good investment. Among the many issues to consider are the overall strength of the industry, the company’s products or services, and the business’s profits, earnings history, and outlook. To get this information, you can turn to the company’s financial reports and do online research. Or you can buy a mutual fund or exchange-traded fund that invests in U.S. or international stock markets. A mutual fund or exchange-traded fund will give you immediate diversification that can help reduce investment risk. Remember: these funds need to be thoroughly researched as well.
Think Long Term
If you’re new to the game, it’s generally best to consider the stock market as a long-term investment. The stock market can be volatile, but if the value of your investment is increasing over time, the ups and downs along the way may not affect your long-term goals. It’s also a good idea to talk to your CPA about the tax implications of holding short-term vs. long-term investments.
Know the Pitfalls
As part of your research, it’s important to consider the risk associated with the investment. Since the price of stocks can go up or down, there is a chance of losing some or all of your money. That’s not the case with other investments, such as money market accounts and certificates of deposit. However, the return on those safer investments may be less than what you could earn in the stock market. Your CPA can help you determine the right amount of risk given your financial situation and tolerance.
Address High-Interest Debts First
While investing can be an important part of smart financial planning, stock market investments shouldn’t take priority over paying your bills each month or lowering outstanding high-interest debt obligations, such as credit card balances. Also, don’t invest using money that you know you will need in the near term.
Consult Your CPA
The stock market can be a good investment, but there are many issues to consider before jumping in. The five tips discussed here offer an introduction, but your local CPA can give you a fuller picture and provide insights customized to your own situation and needs. Turn to him or her with all your financial questions. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.