Five Questions To Ask Before Making A Stock Purchase

Reviewed: May 25, 2016
By FinanceWeb

Investing in a stock is an important mission that ought to be taken seriously. This means at least a few critical thoughts should pass through one’s mind before clicking that button and making the purchase.

1) Why Am I Investing In The Stock Market?

Before throwing money into the market first consider what reasons you have for doing so. Obviously, everyone wants to make a profit in the market, but is that the only reason you are making this move? Many people find that they want to put their money to work in the stock market because they see others making money. That can lead to chasing returns and making exactly the wrong kind of investment decisions.

2) What Kind Of Investing Strategy Is Right For Me?

Different types of investors require different types of investing strategies. A lot of this comes down to the risk tolerance of the individual investor as well as their age and stage in life. A younger investor with plenty of time on his or her hands can consider taking on greater than average risk in their investments. If the investment turns sour on them, at least they have the time to recoup those losses and make better and safer investments in the future.

3) What Type Of Broker Is Right For Me?

Stock brokers are a necessary go between for an individual investor and the largely stock market. The investor has to have a third party to facilitate the trades in the vast majority of cases. There are a few exceptions known as “direct purchase” programs that some of the largest and most iconic American companies provide, but these are the exception to the rule.

Many people are familiar with the old way of trading stock whereby they would call up a broker and ask that person to place an order for them. Those types of brokers still exist, but they are becoming a harder thing to find. Many traders have turned to electronic trading via their personal computer. These are typically low commission options that give the traders more flexibility in placing their orders.

4) Does The Stock Pay Dividends?

A stock that pays dividends literally returns money to shareholders on a quarterly basis. The amount that is paid as a dividend depends upon the company. Some offer no dividend at all (particularly smaller companies that are just getting started). However, the companies that do offer a dividend are going to offer the option to receive a cash payment or a reinvestment into more stock.

In other words, a stock that offers a 4% yielding dividend would pay out 1% on a quarterly basis. The investor could decide to take the 1% as a cash payment ($10 for every $1,000 invested), or that investor could have the money automatically invested into more stock in the same company. That increases their overall holdings and means that they receive even largely dividends going forward.

5) Do I Have The Stomach For The Market?

This final question is an important one. Knowing for sure that you can weather the market’s ups and downs matters greatly. If you go into the market excited and thinking that it will act like an ATM machine for your money, you probably have the wrong mindset. You should always remember that there is risk involved in any market. You have to be prepared to tackle the markets ups and downs as they come along. If you have a long investment time horizon, then you shouldn’t worry too much about a few down days. In the long run they won’t matter that greatly.