How to Know If You're Ready to Invest in the Stock Market

by Tim Plaehn
Sticking to a monthly budget can make it easier to set aside money for savings and investment.

To a great extent, successful investment in stocks depends on letting money work over time. The longer your money is invested, the greater your investment account value when you want to start making withdrawals. On the other hand, your finances should be organized so you will not need the money you have put into stocks. It does not take a lot of money to get started, so you can get yourself prepared in a short period of time.

Plan of Procedure

Set aside an emergency fund before you start putting extra cash into investments. You should have money in a liquid account, such as a savings or money market account, so you can access those funds quickly if something happens. The rule of thumb is that an emergency fund should be enough to cover between three months and nine months worth of expenses. You can start investing with a smaller emergency fund if you plan to add to it as you add to your stock portfolio, but don't leave yourself short.

Control your credit card debt. If you're carrying high balances on your credit cards and make payments at or near the minimum amount each month, you aren't ready to start investing. If you have extra money available, use it to pay down your credit cards first. As the card balances start to fall, you may be able to divert some money into investing.

Now it's time to build up a starter investment fund. You'll need $1,000 to $3,000 as the initial investment for most stock mutual funds. A similar amount should be adequate to get started if you want to buy individual stocks or shares in exchange traded funds, which give you access to a professionally managed portfolio of securities. You could let the money in your emergency account accumulate until you have enough to start investing. Another approach is to open a low minimum discount brokerage account and make regular cash deposits to boost your balance.

Start investing through your job. If your employer offers a 401(k) retirement savings plan, start setting aside a small percentage of your wages into the plan as soon as you are eligible. The retirement savings plan should offer a selection of stock and bond mutual funds as investment choices. Mutual funds, like exchange-traded funds, are packaged investment products that allow you to buy shares in a professionally managed portfolio of securities.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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