6 Simple Questions to Ask Yourself Before Investing in the Stock Market

By Todd Kunsman


Published on

Updated on

Investing in the stock market can be a mix of emotions and can take you on a roller coaster ride financially if you are not prepared. It can also be intimidating, scary, and sometimes, plain confusing at first.

Then, add in the media headlines of doom and gloom, which certainly do not help your potential feelings. As well as tons of publications telling you what to invest in or what not to, which might make you feel uneasy.

Those were all things I felt at first and I’m sure most people new to stock market investing do as well. One of the important steps to getting started, is to ignore all the noise and focus on yourself.

By investing in the stock market, you can elevate your wealth overtime and reach your future financial goals, like retirement. I’ve been invested heavily for a few years now and it’s been one of the smartest things I’ve done financially.

As you start looking to put your money to work in the stock market, you need to ask yourself some simple, but important questions before doing anything.

Do I understand basic investing terms and know how stock market investing works?

Before anyone fully jumps into stock marketing investing, it’s important to ask yourself if you understand the terminology. And more than just investing terms, do you know the basic fundamentals of how the stock market works?

Before jumping into pretty much anything, I find it important to know what certain things mean, and understand how something works.

You don’t need to know every little thing, but at least get your knowledge on a bit first.

There is a lot of moving parts to the stock market, but if you spend some time learning it’s fairly easy to understand. This knowledge will help you make better investing decisions along your financial journey.

Side Note: If you want a crash course on what the stock market is, how it works, and more, definitely check out this great article from Investopedia.

Why am I investing in the stock market?

Probably the most important and first question you should be asking, is why you are investing in the stock market? This will usually come down to your goals like looking to save for future retirement, generate passive income, etc.

But you need to know why your are investing in the stock market. It will help you stay on track with your portfolio and help you choose your correct investments.

Your goals will probably change over time and you may have more than one goal, which is why you should re-evaluate once a year (or more if need). This will help you adjust and ensure you are investing in the right assets.

My goals have stayed the same for the last five years, but I know as I get older my portfolio will start to shift to more conservative.

What is my risk tolerance with my investments?

You need to ask yourself when you first start to consider investing, what your risk tolerance will be. You don’t want to be overly aggressive and invest all your money, otherwise you set yourself up for a quick financial disaster.

Although that may be obvious, it happens to newbie investors more often than you think.

The other things to consider, is if you are investing for short-term gains or for long-term reasons like retirement. This will help you determine how conservative, aggressive, or how diversified you should be, and if you can handle big stock market swings without panic selling, etc.

So before you start, understand the risks and figure out if you are willing to fight through wild swings for long-term gains, or looking to be more conservative to protect yourself from losses if you need the cash in a shorter time frame.

If you need more information, the SEC has some extra info about assessing risk here.

Am I mentally prepared for the stock market ups and downs?

Investing in the stock market is one emotional ride that can disrupt your financial goals if you make rash and emotional panic sells.

There will be massive swings up, down, and sideways with contradicting information all over. If you aren’t mentally ready, you’ll fall victim to the buy high, sell low mentality.

Even if you think you are prepared, you probably still aren’t when your first major swing in the negative direction happens.

It took me my first year to still be able to block out the noise and recognize that:

  • The market will have corrections and can have wild swings
  • While experts may have good stock analysis, no one really knows everything that can trigger certain swings
  • Timing the market rarely results in consistent results

I read so many books and articles about getting your emotions in-check with investing in the stock market. I understood and recognized it, yet when there was a lot of doom and gloom with the market, I’d get fidgety.

I started selling and buying other funds, when if I stayed put and continued investing, I would have been completely fine. It was a great lesson and one you probably will face too, even when you think you are mentally ready.

Do I understand what I’m going to invest in and why?

As you get ready to start investing in the stock market, you have quite a bit of options. Think of what type of account(s) am I going to open or invest in? Like IRA, Roth IRA, 401k, Brokerage account, etc.

Each one of those accounts might be for different reasons too (see question #1), but then you also have to consider what you’ll be investing in as well. Index funds? Mutual funds? Bonds? ETFs? REITs? Individual stocks?

Not everyone is going to be an investing expert or manage their own investments. But, it’s still important to know what your investments are and why these make sense. Also look at historical gains, what kind of stocks or bonds are in it (if an index fund or mutual fund), etc.

If you manage it on your own like me, it will take some research and trial and error. I’m not perfect either, but I’ve found my portfolio that I’m comfortable with and know why I feel that way.

Any losses because of my dumb mistakes early on were okay because I have time to recover. I also knew I was investing for the long-term and not throwing all my money in at once.

But it’s perfectly fine to work with a trusted financial advisor who has your best interests at work and can help you explain your investments.

Either way, you need to at least have a understanding of what your investments are or will be.

Who am I investing with? Do I understand their fees?

Another important question to ask yourself, is what financial institution you plan on investing with. And, do you understand their basic fees? (any management fees, fund fees, rollover fees).

There are many investment institutions to choose from like Charles Schwab, Voya, American Funds, Fidelity, and my favorite Vanguard. Yet, if you have a company 401k plan, you won’t have a choice as that’s who your company has chosen.

If you have an employer sponsored 401k, it might also be a good idea for you to get a free portfolio analysis from Blooom. They’ll analyze your current portfolio and provide recommendations to get you on track. Get started for free here.

No matter what, you should understand any fees that may be involved.

High management fees (I consider anything 1% or higher) can eat away at your gains and even cut years off your financial goals. Again, you won’t have much control over your company plan, but it can help you make healthier choices.

Final Thoughts

As you start investing your money in the stock market, there will inevitably be other questions to ask yourself that are related to the investments. It will get more involved as you add more money and time goes by.

But hopefully, the questions above are in this post are helpful if you are just getting started. Without asking some of these crucial questions and just throwing your hard-earned money in, you can easily lose your money or be on the wrong financial path.

And if you still are uneasy, you can always ask for help at the financial institution you choose to invest with or a financial advisor. Remember, always pay attention to their reputations, fees, and if your interests align with their investment plan for you.