What you do before getting involved in stock market trading can be equally, if not more, important than your actual investing. Let’s say you come into some money–$25,000. Your instinct is that you would like to invest it. Before you do, make sure you have done each of these five things.

1. Max out pre-tax retirement savings.

Before investing in the stock market, invest as much as you can into Superannuation. Invested as pre-tax dollars, those retirement contributions will be taxed at a lower (15%) rate than if that money were counted as regular income and then invested elsewhere.

2. Pay down your debt.

More specifically, pay down your high-interest debt, like credit cards. If what you owe is accumulating interest charges at a higher rate than the interest you can realistically expect to earn on investments, even good investments will ultimately cost you money.

3. Set aside an emergency fund.

How much money you set aside will vary from person to person, or family to family. At a bare minimum try to set aside a cash emergency fund equal to one month’s expenses. More ideally, set aside enough to cover three to six months of living expenses (such as if you lost your job). Make sure that money can be easily accessed if needed rather than put into investments where it could be lost.

4. Decide what you can really afford to invest.

Talk to a financial planner if possible. Find out if your “extra” money is really best-suited for investing in the stock market, and if so how much you can afford to invest. You would have already done this to some degree by paying down debts and setting aside an emergency fund first.

5. Do your research.

If you’re completely inexperienced in stock market trading, don’t jump into it with high expectations of huge earnings in short periods of time. Research market trends, specific companies you may want to invest in, and even the process of trading itself. Try a trading simulator first to see how you fare without risking actual money. Also take time to research your investing options (not only deciding between stockbrokers and / or online trading, but also whether stocks are the right type of investment for you).

It can be easy to make rash decisions when you have money to “play with.” Just make sure you fully understand the risks and are prepared for the worst-case scenario of losing money before committing it to investments. If you do face losses, remember that it’s better to have the backup of lower debts, more in retirement accounts, and an emergency fund than it is to risk it all.

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