What to Know Before Investing in Stocks: 5 Costly Mistakes

What to know before investing in stocks can feel overwhelming when you’re just starting out. I remember asking myself over and over: what are the things to do before investing so I don’t mess it up? With so many different recommendations online, I felt lost and confused.

And I did mess it up. I made mistakes that cost me money — which is exactly why I wrote this. It’s the post I wish I had read before I ever started investing.

That’s why I’m keeping it simple here. In this post, I’ll share the essential steps that will give you the confidence to begin investing wisely.

🤔 What to Know Before Investing in Stocks Instead of Jumping In Blindly

When I first thought about buying my first stock, I just felt the urge to get started. So, I jumped right in. I picked a few companies I thought were solid investments, bought a couple of stocks, and literally ended up losing money. Back then, I hadn’t heard of index fund investing or investing for passive income. And I had no idea what to know before investing in stocks.

The truth is, jumping in without preparation can easily backfire. There are a few things to do before investing that can save you from unnecessary mistakes. Think of it this way: investing blindly is like driving without Google Maps. You might eventually get somewhere, but chances are high you’ll take costly detours along the way. That’s exactly why I created this guide on what to know before investing in stocks.

📊 Step 1 – Understand Your Financial Picture

First, let’s talk about where you’re starting from. Understanding your personal financial situation — your true status quo — is the preliminary step you can’t skip. You may even discover some financial surprises as I did. Without that clarity, it’s like building a house without a foundation.

Financial Checklist Before Investing

Before you take the next step, ask yourself a few key questions. If you can’t answer them yet, this is the perfect place to start — completing this financial checklist before investing will be a huge milestone in your journey:

• What’s in my retirement accounts, and how much have I accumulated in total?
• What state pension contributions have I made so far, and what can I expect later?
• How much money is sitting in short-term or high-yield savings accounts?
• How much debt do I carry, and what are the exact amounts?
• What assets could I sell if needed, and what is their current value?
• After adding it all up, what’s my net worth? Am I in the red, or do I have a positive balance?

Check Your Net Worth Before Investing

When you think about what to know before investing in stocks, your net worth is the very first number to look at. Your net worth is simply the total of your assets minus your debts — in other words, what you truly own. Tracking this number regularly is the foundation for planning your wealth growth.

I can’t recommend this enough: figure out your personal net worth as soon as possible. For Marc and me, it was a life-changing process — even though we struggled at first. Estimating the value of our household goods took trial and error, but it was worth it. We wanted a clear way to track how our wealth grew over time, and that’s why we created a simple method to make it easier for others too.

Our Net Worth Calculator is designed to simplify the process. With 4 sheets — net worth, asset balance, debt balance, and household goods — you can calculate your net worth quickly, set financial goals, and track your progress over the next 10 years.

Whatever your net worth is today, knowing it gives you clarity. That’s what matters most. And remember, there’s no shame if you’re in the red — what counts is that you now have a starting point.

💳 Step 2 – Pay Off High-Interest Debt

If you’re wondering what to know before investing in stocks, this step is essential. The stock market may return 9–10% over the long run, but if you’re paying 15% interest on debt, you’re still losing money. That’s why paying off high-interest debt first is non-negotiable. It’s the only way to build a solid foundation for wealth. And that foundation is a huge part of what to know before investing in stocks before you ever put money into the market.

Debt was also one of my biggest struggles. In my 20s, the company I worked for delayed my salary for months. To cover everyday expenses, I relied on credit cards since I had no savings to fall back on. I thought I could pay everything off once the money arrived, but with interest piling up at 15%, it quickly became a financial trap.

The lesson? Waiting for “more money later” doesn’t fix debt. I learned the hard way that real wealth doesn’t come from earning more — it comes from living below your means, building an emergency fund as a safety net, and creating good financial habits that last.

🛟 Step 3 – Build a Safety Net Before Buying Stocks

When we first moved into our own home, a part of the heating oil tank broke. Luckily, we had some money saved to cover it. But afterward, we realized that if something had happened to our car, we would have been broke. That moment showed us how quickly an emergency can push you into debt if you don’t have savings.

If you’re thinking about what to know before investing in stocks, building an emergency fund is critical. It keeps you from dipping into your investments or relying on high-interest debt when life happens. Think of it as your financial lifeguard. Many beginners underestimate this step, but understanding it is central to what to know before investing in stocks.

How much to save for your emergency fund? A good rule of thumb is 3–6 months of living expenses, ideally in a high-yield savings account. If that feels impossible, start with a small “starter emergency fund” of around 1,000 and build from there.

To calculate your fund accurately, you need to know your exact living expenses. Rough estimates won’t work — track your spending by category to get the real numbers. A simple household budget makes this much easier.

Creating A Budget – If You Haven’t Already

Marc and I have been budgeting for over 10 years, and it completely changed the way we handle money. Marc loves using YNAB (You Need a Budget) — and even though I was skeptical at first, I now find it simple and incredibly helpful.

Budgeting is key if you’re thinking about what to know before investing in stocks. A budget shows exactly where your money goes and how much you can safely invest.

For us, the amount to invest has ranged from 300 to 2.000 Euro per month, depending on income. When I was on parental leave, we had much less to work with — and I didn’t feel comfortable investing all of it. In another post on How to Invest Little Money in the Stock Market, I explain why even small investments can still make a big difference.

That’s the point: you need a budget to see your extra money clearly and decide how much of it to invest. Managing your budget is really about balancing priorities. It also strengthens your “financial independence muscle” by making you more intentional with every euro.

If you’d like a step-by-step look at how to align your budget with early retirement or semi-retirement goals, start here.

Creating A Bare Bones Budget

If you’re wondering what to know before investing in stocks, here’s one of the most important lessons: a bare bones budget keeps investing on track, even when income drops or unexpected costs hit. It makes sure investing isn’t treated as “leftover money” but as a priority.

The idea is simple. Separate your fixed expenses (needs like housing) from your variable ones (wants like eating out). A bare bones budget goes a step further by showing your true necessities — because in reality, almost every expense is variable.

I learned this the hard way during parental leave, when our budget was stretched thin. After trial and error, I developed a method to focus only on essentials. That’s how our Bare Bones Budget Calculator came to life — and I still use it today.

In another post, I walk you through how to build your own bare bones budget step by step. And if you want a quick start, try our free Simple Bare Bones Budget Calculator.

📚 Step 4 – Learn the Basics of Stock Market Investing

Investing Is Not A Luxury, It’s A MUST

If you’re wondering what to know before investing in stocks, here’s one truth: investing isn’t just for the rich. It’s for everyone — even if you only have small amounts to start with. What matters most is building the habit of investing consistently over time.

Learning the basics — risk, diversification, and consistency — is at the heart of what to know before investing in stocks.

In the FIRE community, we often talk about saving and investing 50% of income, but don’t let that overwhelm you. When you’re just starting, the amount doesn’t matter — consistency does. Commit to raising your contributions step by step as your financial situation improves.

A simple way to do this is with Dollar-Cost Averaging. Just keep investing regularly, and whenever you have unexpected extra money, put a portion — or even all of it — into your brokerage account. Over time, this steady approach creates real financial security.

In another post, I’ll share practical strategies for getting started with investing small amounts and how to grow them effectively — or even with 0 (yes, investing with nothing is possible!).

Diversification Of Your Investments

If you’re thinking about what to know before investing in stocks, one of the most important rules is diversification. Simply don’t put all your money in one basket.

An asset is anything you own that can grow in value over time — from stocks and real estate to gold, art, or even a business. To protect your wealth, spread your money across different asset classes rather than relying on just one.

Even within a single class, diversification matters. In real estate, don’t tie everything to one property or one location. In the stock market, don’t invest in only one company. Instead, diversify across industries, countries, and products like index funds and ETFs.

🎯 Step 5 – Decide Where to Invest (Based on Goals)

If you put money into an investment you don’t understand, you’re speculating, not investing. To invest wisely, learn the basics of the products you choose.

When I first invested in index funds like the MSCI World, I asked myself simple questions: What exactly is this fund? Who created it? What’s its track record? With the MSCI World, for example, it’s a global index launched by Morgan Stanley in 1975, averaging around 9% annual returns. Questions like these help you understand what you’re buying.

Curious about the MSCI, its sub-indices, or the S&P 500? I dive deeper into these benchmarks in another post to help you understand the MSCI or the S&P 500 better before investing.

If you’re wondering what to know before investing in stocks, the easiest way to decide where to invest is to get clear on your financial goals. Once you know whether you’re investing for the short term or long term, your risk tolerance becomes much clearer.

Setting goals and aligning them with your strategy is a crucial piece of what to know before investing in stocks if you want to build lasting wealth.

Short-Term Investments

Short-term goals (like saving for a house down payment in 2-5 years) require easy access to your money. Safer options like government bonds or bills may have lower returns but match your timeline. Index funds or stocks could earn more, but the stock market can be unpredictable in such a short period. That’s why most financial advisors recommend: don’t invest money you’ll need within 2-5 years.

Long-Term Investments

Long-term goals, like retirement, allow you to take on more risk. Tax-advantaged accounts (through the state or an employer) can be a good start, though they could limit your choices. If you want to retire early or semi-retire, you’ll need to build your own portfolio — often with index funds, or ETFs.

Clearing Your Risk Tolerance (From a New Perspective)

If you’re wondering what to know before investing in stocks, understanding risk tolerance is key. Risk isn’t just about how much loss you can handle — it has multiple dimensions:

• Volatility: the ups and downs of the market.
• Potential loss: more common with individual stocks.
• Recovery speed: how quickly an investment bounces back after a downturn.

That last one is often overlooked. For example, stocks and index funds are volatile, but they also tend to recover faster than bonds. From this perspective, they can even be “safer” over the long run. Personally, I prefer stock ETFs and index funds because they spread risk while still offering strong growth potential.

🎮 Bonus Tip: Use A Stock Market Simulator

If you’re still unsure about putting your own money into the market, try a simulator first. Platforms like the Investopedia Stock Market Simulator let you practice with virtual money before opening a brokerage account. It’s a safe way to learn how investing works — and even kids can use it to get comfortable with online investing.

To truly see the power of compounding, I also recommend running your own numbers with our free Investment Growth Calculator. If you’re wondering what to know before investing in stocks, nothing is more eye-opening than visualizing how small amounts grow over time.

Take this example: Sara invests 25 per week (about 100 per month) starting at birth, earning an average 10% return. By age 50, her portfolio grows to about 1.4 million, with only 60,000 contributed.

Now compare that to Alex, who waits until age 30 to start investing. To match Sara at age 50, he would need to invest 2,030 every month, adding up to a staggering total of 487,200 (24.350 per year for 20 years). That’s more than 8 times Sara’s contribution — just because he missed 30 years of compounding.

The lesson? Start early, even with small amounts. Over time, consistency beats size, and your future self will thank you.

❓FAQs: Common Mistakes Beginners Make (and How to Avoid Them)

What to know before investing in stocks to avoid mistakes?

The biggest mistakes beginners make are investing with emotions, failing to diversify, and chasing hot stock tips—I’ve been there myself. A better approach is to start small, spread your money across different investments, understand exactly where your money goes, and stick to your plan instead of reacting to every market swing.

What are the top things to do before investing?

Focus on three essentials first:

1. Pay off high-interest debt (like credit cards).
2. Build a fully funded emergency fund.
3. Learn the basics of stock investing and risk.

These steps give you a safety net and the confidence to invest without fear of losing money on day one.

Should I start investing if I still have debt?

If you have high-interest debt, pay that off before investing—because the interest cost is usually higher than potential stock market returns. But with low-interest debt (like a mortgage), you can often invest alongside repayment, especially if you’ve already built an emergency fund.

Learning what to know before investing in stocks is just the start of your journey. If you picked up even one new idea today, subscribe below for more simple, proven steps to invest with confidence and move closer to financial independence. I’d also love to hear in the comments: what’s the biggest challenge you face before investing?