Decide if you’re ready to invest
There's one golden rule of investing you should always remember: never invest money you can't afford to lose.
There are several other factors you should consider before you dip your toes into the stock market waters:
Have you got an emergency cushion?
Do you already have an emergency cash cushion in a savings account? The cushion should be equivalent to at least three months’ salary. This will help you cope financially with any unexpected events. You really need to have some emergency cash available before you consider investing.
Have you got debts?
If you have debts other than your mortgage, it’s unlikely you’ll earn a better return on your shares as a new investor than the interest you're paying on your debts, so clearing your debt first should be your top priority. It’s particularly worth considering offsetting your savings against your mortgage if you are a higher-rate taxpayer, as you’ll save a lot of tax that way.
Are you in it for the long-term?
You need to be prepared to invest for at least five years. Investing in shares is a risky business. Shares can be very volatile, so if you need your money quickly, you may have to sell your shares at a loss. Five years is generally regarded as the minimum appropriate period for stock market investment.
What’s your attitude to risk?
Think about your attitude to risk. If you're really cautious, stock market investing isn't really for you. Remember any money you invest is at risk, and if the shares you choose don't perform well, you will lose out.
Are you happy to pick your own stocks?
Don't forget, you don't have to pick your own stocks. If you're new to investing you could try investing your money in an index-tracking fund first. An index-tracker ‘tracks’ or mirrors the performance of the index it’s based on. If you choose a FTSE 100 tracker, for instance, the fund will be invested in all the top 100 UK companies. Other trackers are available which track other UK indices or markets in other countries.
Trackers are a cheap and easy way to gain exposure to the UK stock market without having to pick the shares yourself.
Have you got time to do research?
If you decide you're ready to take the plunge into the stock market and buy shares yourself, you must do your research first. Buying company shares is a high-risk investment, and shouldn't be done until you've fully checked out the prospects of the company you're interested in.
It makes sense to spend some time learning about the stock market first. Read as much as you can. The Motley Fool is a great place to start. Also look at the Financial Times or any of the ‘quality’ newspapers. The Investor’s Chronicle is worth a look too.
Start a practice portfolio
Pick a few shares and stick them in a portfolio on a site such as Yahoo Finance. Don’t buy the shares with real money. See how the shares perform over six months or a year and you’ll probably learn a lot. You may even decide stock market investing isn’t for you. On the other hand, you might find you have a real knack for investing!