Five Things to Know Before You Invest
The term “Investing” generally refers to the act & process of putting one’s wealth into assets (such as corporate stocks, government bonds, etc.) that are assumed to appreciate in value over time. An individual will store their money into something like a stock, and when the value and/or price of the asset goes up, they will net a profit. Investing does come with risk, however, as the value of the asset could just as easily depreciate rather than increasing, costing the individual who invested dearly.
Thus, investing should always be undergone with a level of aptitude and preparation beforehand which this article will seek to aid you in achieving.
Five Pieces of Knowledge For New Investors
Here I’ll break down, one by one, some of the most crucial pillars of understanding regarding the field of investing. Every newcomer would do well to absorb these lessons and heed them in the future.
Investing vs. Trading
Contrary to popular opinion, general investing and trading are not the same whatsoever. Each path of asset management pertains to completely different processes and mindsets, distinct from one another. Investing is primarily a passive activity; the stereotypical investor will be an individual looking to store their wealth away for a sizable amount of time, hoping to essentially “let it sit.” This is not so with the trader.
Someone who would partake in trading would, instead, be seeking to store their wealth away within an asset for a small amount of time, looking to essentially “flip” and make a quick profit off of the asset in question before turning their attention to the next fast-mover. Trading is primarily an active activity as opposed to a passive one, and as such traders spend their days looking conducting a substantial amount of market activity research that most regular investors don’t partake in.
You Will Be Taxed
As effective and efficient as investing is, it’s not as simple as putting your money in and taking it out come profitability. Investments are subject to taxation, and this can sometimes take new market participants by surprise. Most investment taxation comes in the form of a capital gains tax, but even these can be deduced through qualifying for something known as “trader tax status.” Trader tax status is an available tax status for private citizens that enables them to constitute for business expense treatment, allowing for an assortment of deductions and significant tax benefits.
Another note to keep in mind when facing the subject of taxes for investing is the fact that the holding period for the investment will impact the tax rate it is subject to. The tax rate for long term investments (any assets held for over a year) can be taxed at a rate of anywhere from 0% to 20%, depending on other factors such as taxable income and filing status.
Emotions Don’t Work
A common mistake in this field, even for seasoned investors, is to allow themselves to become personally attached to a stock or asset. They become not only financially invested, but emotionally so as well. This is a crucial flaw in investor psychology and should be rooted out at all costs. Becoming emotionally charged via stock or asset simply blurs the vision with which you analyze it with. It can make you irrational, open to bad judgment, and disconnected from objective reality.
Never Stress the Moment
As an investor, your first priority is long-term gain. This means that obsessive attention to the market would be detrimental to your overall trading strategy and is plain ill-advised. There’s no point in sweating the moment-to-moment movements in the market when you’re intending on playing the long game with an investment. Don’t stress yourself out.
Never Get Greedy
Finally, the last piece of crucial knowledge that we have for you is to warn you of never letting greed direct your actions. If the investment you dived in starts to net considerable profit, get out while you’re ahead. Trying to ride an asset all the way “to the moon,” as they say, could end with you holding the bag and being stuck with a depreciating asset.
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