In recent times, there has been a decline in a majority of asset markets, including shares, currencies, and bonds. A hike in Federal rates, Russia-Ukraine unrest, and a fresh outbreak of the Coronavirus pandemic in China are some of the reasons behind this trend. Right now, stock market enthusiasts are in the dilemma of whether they should invest in the stock market or not.
The straightforward answer to this question is, there is no right or wrong time to invest in the stock market. An investor can understand the difference between demat and trading accounts and start investing in the stock market after a few considerations. Here are some points to help an investor decide when he should invest in the stock market.
Invest When You Understand The Functioning of the Stock Market
An investor should have basic information about the stock market before investing. He can try to spend some time understanding the basic stock market terms, markets, factors that affect a stock’s price, the process of evaluating a company, risks associated with stock market investments, etc. Once an individual has equipped himself with at least the basic knowledge about the stock market, he can start investing and enhance his learning through experience.
Invest When You Have Enough Investible Funds
Investing is essential to meet future financial goals and create wealth. However, it is equally essential to meet the current expenses. An individual can make a monthly budget that covers his routine expenses, like rent, commuting, food, etc. It is also crucial to have an emergency fund before you start investing your spare money in the stock market. Ideally, the emergency fund should be enough to cover your three to six months of routine expenses if a need arises. Once you have made provisions for all these expenses in your budget, you can use the surplus cash for stock market investment.
Invest When You Know the Process and Costs of Investing in the Stock Market
An investor can invest in US stocks from India as well as in domestic stocks, once he knows the process of investing and the costs associated with it. You will require a demat account and a trading account to start investing in the stock market. To have these accounts, you must fulfil the KYC (Know Your Customer) requirements of the broker. An investor has to pay certain account opening charges, annual maintenance charges, and trading charges to the broker to trade in the stock market. Some reputed brokers open free demat and trading accounts for customers and do not charge any annual maintenance charges for the first year.
Invest Once You Know Your Investor Profile
Every investor has unique financial goals, investment needs, income, and preferences. A close analysis of all these will help an investor decide if it is a suitable time for him to invest in the stock market. Every investor should be aware of the following points about himself:
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- Financial goals: Every investor has a different motive behind investing in the stock market. While someone may want to invest to plan for retirement, another person may want to invest to buy a house. Understanding the investment goal will help the investor in understanding the returns he expects from the market and his investment horizon.
- Ability to handle risk: Stock market investments are not risk-free. While some financial instruments carry huge risks, others may have a lower risk profile. It is crucial to understand your risk appetite before investing in various financial instruments.
- Time horizon: Depending on the investment goal, the time horizon for an investor will be different. Knowing your time horizon is necessary because different types of market instruments require different investment periods to give desired returns.
By evaluating the points mentioned above, an investor can decide if he is prepared to enter the stock market or if he needs more groundwork.
