Is Investing In The Stock Market Right For You?

Posted by Allison on 5 April 2009, 10:54

Everyone would love to earn more money but wanting it and knowing how to get it are two different things.  Lots of people are turning to property to buy up dilapidated houses, do them up and sell them on for a profit, but this involves a lot of work and it's not as easy as you might think.

The other main option that many people think about trying is investing in the stock market.  This involves looking at various different companies and deciding which ones offer the best chance of making a profit on.

You could also try getting involved in the money markets; instead of requiring you to invest in a company, the money markets actually involve investing in currency itself.  In this case you need to have a good knowledge of which currencies are doing well against other ones, and buy the right currency at the right time in order to make a profit.  When the exchange rates and performance between currencies changes, the idea is to then sell your currency back to make a profit.

This is far riskier than investing in the stock market, although it should be understood that investing in stocks is far from a safe bet.  If you are thinking of investing your money in this way there are a number of things you need to bear in mind before you begin.

The first and most important thing is to decide how much money you want to invest in the stocks you are going to buy.  Where has this money come from?  Is it from your savings?  Have you perhaps put aside a specific sum over time especially for investing in the stock market?  Or haven't you thought about where the money is coming from as yet?

The most important question that you have to be able to answer is this one – can you cope with losing that money?  If you will need it for some reason or another (even if it's only a possibility) then you should not invest it in the stock market.  While traditionally money invested in the stock market has returned better interest than the same amount put into regular savings accounts, there is still a percentage of risk involved and there is always the chance that you will lose all the money you have invested in your stocks.  That is why it's important to be comfortable with that fact.

However that doesn't mean you should take unnecessary risks with that money.  There are two basic ways to get involved in the stock market – you can either seek the help of an adviser who knows a lot more about the market than you do, or you can try and go it alone.

The first option is undoubtedly the best one for anyone who has a low level of knowledge to play with, since it will reduce the chances of your investing in a stock that won't perform well for you.  Because some people do manage to make a lot of money on the stock market there can be a lot of emotion involved when it comes to deciding where to put your money to achieve the best results.

It's also important to realise that while some people do make short term gains on the stock market these tend to be very few and far between, and even when those gains are triggered by having an extensive knowledge of stocks, they tend to be put down to luck more than anything else.

Broadly speaking there are two main areas of stocks (more commonly called shares) that you can get involved in.  The first area concerns the top listed companies, which in the UK appear in the FTSE 100 Index.  These are the one hundred best performing companies in the UK.  Investing in their stocks tends to be a lot safer than investing in stocks of more unknown companies, although there is not as much opportunity to make a lot of money out of them, since by definition they tend to be quite steady and stable for most of the time.

The second area of stocks and shares is the one in which there tends to be more volatility.  You are more likely to make a significant profit in this area – but you are also more likely to make a significant loss as well.

There are plenty of stories of vast fortunes being made by people who had the foresight (or luck?) to buy shares held by what would turn out to be one of the biggest companies in the world.  Huge household names such as Microsoft have certainly seen their shares rocket up in value since they first started out.

But for every story that turns out to have a hugely happy ending like this one, there are dozens more that come from companies who don't do so well, or that fold altogether.  When the Dot Com bubble burst a few years ago a lot of people lost a lot of money because they had backed companies who weren't worth as much as their share prices would have you believe.

This is why it is so important to make sure you get the proper advice and find out as much as you can about the area of the stock market you are thinking of getting involved in, before you actually make the leap and do it for real.

Some people actually try trading in a 'virtual' stock market.  They create shares on paper and invest them for a few weeks or months until they get the hang of how it works.  Once they have built up some confidence they start investing their money in the shares they think will provide the best return over time.

In short, if you aren't happy with the level of risk that the stock market inevitably provides, then you would probably be better off investing your money in the best savings accounts and long term savings plans you can find.