What to do before Investing in Stocks.

For some time now, I’ve been reading and following Ryan Hoover and his passion about African Markets on his Blog, Investing in Africa. In his article about How to Invest in Johannesburg Stock Exchange (JSE), he responded to a comment on what to do before you start investing in the stock market. His advice is true; I saw a difference in my investment lifestyle after doing this some years ago hence my desire to share this with you.
 In Ryan’s own words;
“I usually suggest that you pay off all high-interest debt (anything with an interest rate above 10%) before even considering investing in the stock market. This could be a credit card at Truworths or a furniture loan from Lewis. Maybe a car or school loan.

Why pay off debt first? Because paying off debt is a GUARANTEED way to reduce your expenses. Stocks, on the other hand, are NOT guaranteed to increase in value.

Let’s suppose that you receive a gift of R1000 from your family. Let’s also suppose that you have R1000 worth of debt at an electronics store that carries an interest rate of 20%. This means that you are paying R200 worth of interest charges on that debt every year. If you paid the debt off, you would essentially be earning R200 — a return of 20%. If you decided to invest the gift in the stock market instead, the value of your investment would have to increase more than 20% that first year in order for it to be a better use of your money than paying off the debt. Is it possible that this could happen? Yes. Is it very likely? No. Take the guaranteed return by first eliminating your debt. 
The other thing you should do before investing in stocks is to save up an emergency fund that is equal to at least six months of your living expenses (housing, food, transport, medical, school, etc.). Open a bank account and save up that cash for a rainy day. If your family should no longer be able to support you, or you are unable to find a job, that emergency fund can give you some breathing room while you look for a new source of income.

Only after you have done both of these things should you even consider investing in the stock market. And then I would advise you to invest for the long-term. Plan to invest for at least five years and preferably much longer. Start by investing in a diversified fund, like a unit trust, to reduce your risk. Then as your knowledge of investing grows, you might want to start investing small amounts in individual companies that you know well.
I hope this hasn’t totally frightened you! It’s great to begin investing in stocks at a young age, but pick the low-hanging fruit first. Reduce debt, open a savings account, and build a six-month emergency fund.”

So now you know, Doctor’s recommendation. 🙂 . 

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