What to look for in a dividend paying stock? Part 1

Choosing the right stock is certainly the most difficult part of starting an investment account. There are many factors that need to be weighed.

One of the key factors that you first need to consider is before even choosing a particular stock is your risk tolerance. Generally, speaking the higher the risk the higher the potential reward and all investments entail some degree of risk. So how do you gauge your appetite for risk....

Well I remember reading an anecdotal story about a finance account manger who would first ask his clients this very question. Their response would typically be that they are willing to accept a loss of up to 20% per quarter. As it turned out those same individuals would panic and demand that their holdings be sold if they lost just 5% in value during a quarter. 

What this story teaches us is that we don't know how we will react to having lost money in the market until we are put in that position ourselves. Knowing that historically the market has fluctuated we will all undoubtedly at some point find ourselves in the red. How we react at that point in time is critical, as markets tend to recover and the worst thing that you can do is buy high and sell low, or in other words buy on the way up and sell when a stock is on the way down.

So in evaluating whether or not you wish to purchase a particular stock, ask yourself how risky is this investment and should it go south, can I live with that.

Remember: Never invest money that you cannot afford to lose.

Factors that may impact your risk tolerance:
1 - Your age - the younger you are the more time you have to make the money back
2 - Your income - the more income you make the fast you can make any loss back
3 - Your Savings - the more money/ assets you hold outside of a particular investment the better
4 - Your Mentality - A financial loss may impact individuals differently