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Stock Market - How Much Money Are You Planning To Invest?
Planning on your total investment ability is crucial to setting up your trading plan. It is impossible to design a trading strategy without knowing the amount of your investment.
A careful look at your overall financial picture is critical in determining your ability to invest in both short and long term trading.
You will need to answer the following questions to determine your financial ability to trade:
A) Is my job stable?
While you may have been with your company for 10 years (or more) there is no guarantee of job stability. Many companies go through downsizing and while you can look at how stable your job is today, you must be aware that there is no guarantee that you will still have your position a year from now.
In looking at the stability of your job, take into consideration how many 'new' people have been hired, what their qualifications are, and where your particular job fits into the 'big' picture in your particular company.
Today, none of us are guaranteed to be employed by the same employer for our entire careers like our parents may have been. Oftentimes company policies change resulting in changes to your career which you have no control over.
B) What are my savings?
Taking into consideration your current level of income, your savings should be substantial enough to carry you through any 'difficult' periods, including job loss, uninsured medical costs, and other unexpected expenses.
It is never a good plan to invest all of your savings into trading. While you do your best to minimize your risk, there will always be a risk to trading and that could result in substantial loss of your initial investments.
Have I planned for emergencies?
You must always have a back up plan. For those of us who own homes, we know that furnaces break down, roofs need repair and other unexpected things come up all the time. It is crucial to your overall financial health to have contingencies in place for these types of emergencies.
While the overall goal in trading is always to show a profit, it is critical that you not depend on these profits to handle emergency situations that come up. If you were to lose your job tomorrow would you be able to continue to maintain the lifestyle you are leading today for a period of time (six months is typically a good rule of thumb).
Do I have sufficient insurance, medical, life, homeowners, auto?
It is never recommended that you begin a trading plan without assuring that you have sufficient other assets that your family can depend on. You certainly would not consider investing your last $1,000 in the stock market with the expectation of doubling or tripling your investment in a short term trade, and investing in any type of stock market trading should never be considered good financial planning.
What is my other household debt?
Credit cards, auto loans, student loans, etc., all take their toll on your income, your savings and your overall financial health. Be sure that you have sufficient savings to accommodate all of these financial needs for a period of time that you determine to be safe in the event that you should lose your initial investment in any stock or option trade.
When setting out your trade plan, you should take all of your financial obligations, savings, and the overall financial health of your family as a whole before you determine the level of investing that you are prepared to do. It would also be beneficial to you to discuss your intentions with your tax preparer and see what tax concerns trading will create for you, as capital gains and other considerations will impact your trading patterns and abilities.
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