So you’ve decided to start investing in the stock market. Congratulations! Despite all the information that’s available, there are still several common mistakes that a lot of new investors tend to make when they first begin. Avoiding these mistakes will greatly increase your chances of success as an investor.
Perhaps the most important thing to know about the stock market is that nothing is guaranteed. Although it is important to do your research, acting like your stocks can’t drop is one of the quickest ways to lose money. Keep reading to find out what else you should avoid doing as a new investor.
10 Investing More Money Than You Can Afford To Lose
The thing that all expert traders understand about buying stocks as an investment is that it always involves an element of risk. Even for those stocks that appear to be a sure thing, nothing is ever sure in this world. That’s why it’s a huge mistake to invest more money than you can afford to lose.
According to The Street, there is no minimum payment on losses. So by investing more than you can afford to lose, you could suffer major problems if things don’t go your way. Rather than borrowing money to invest or buying on the margin, it’s better to only spend what you can actually go without.
9 Getting Rid Of Stocks Too Soon
For beginners, it can be difficult deciding how long to hold onto stocks. Sometimes, even experienced traders panic and sell too quickly if a day in the market has been particularly tumultuous. “Trading into a position on a down day or down week can poison your conviction,” explains Patrick Morris, CEO of HAGIN Investment Management (via The Street).
Stocks that dip don’t necessarily correlate with a company that’s not turning over a good profit. That’s why it’s not the best idea to get rid of your stocks too soon. If you believe in the potential of the stocks, it’s better to ride the wave and see what happens over the long term.
8 Believing That Some Stocks Are Unsinkable
The belief that you’re investing in a sure thing or can’t-miss opportunity could land you in a lot of trouble. The truth is, absolutely nothing in the world of stocks is guaranteed. Nobody knows exactly what’s going to happen, even after doing all the research in the world. So it’s impossible for anything to be a sure thing.
Though something might have very good prospects and you might believe in it, that doesn’t mean that those stocks can’t dip. This is important to remember when you’re tempted to load up on a position that you believe is infallible.
7 Failing To Do Your Research
It’s true that you’ll never be able to predict for certain what’s going to happen on the stock market. That said, doing your research is still extremely important because it is possible to get a good idea of the market and what is likely to happen. One of the worst things you can do as an investor is parting with your money before actually doing any research into what you’re investing in.
Investor Junkie points out that it’s crucial to educate yourself on each stock you’re considering because you are always taking a risk.
6 Trying To Time The Market
Some traders will attempt to time the market to their advantage. Unfortunately, due to the volatile nature of the market itself, this can end up doing more harm than good. If you try to time the market, your portfolios can underperform the market averages because you might have bought at a high price and sold a low price.
Timing the market involves knowing when to get in and out of the market and that kind of knowledge is just not available in advance. Putting too much focus on trying to time could undermine your success.
5 Failing To Sell A Loser
Another common mistake that rookies tend to make when buying and selling stocks for the first time is holding on to losing stocks for too long. They believe that they should hold onto it until it rises up again. But Investopedia advises against this.
By failing to sell losing stock, you might find that you end up losing money because the stock may continue dipping until it’s worthless. If you sell it while you still can, you can then put that money into something else which may be a better investment.
4 Investing In Businesses You Don’t Understand
For a beginner, the stock market can sound like a whole lot of mumbo jumbo. You might think that you don’t have to understand what companies you’re investing in to be successful, but you really do. You should always understand the business models of these companies before investing. This is part of the research that will help you to determine whether it’s a good investment or not.
According to Investopedia, this advice comes straight from Warren Buffett himself. If you don’t understand a company, you’re not in the position to invest in their stocks.
3 Putting All Your Money Into A Couple Of Stocks
In the same way that it’s not a good idea to invest in businesses that you don’t understand, it’s also not a good idea to put all of your money into just a couple of stocks. Rather, a long-term investment plan should involve diversification. Don’t put all your eggs in one basket, so to speak.
It’s also a good idea to avoid putting all the money you have to play with in the stock market. By investing some in other assets, you avoid suffering too much when the market drops.
2 Becoming Emotionally Attached To Companies
You always have to do your research in a company and believe in its story, but the stock market is not the place to let your emotions guide you. When you get too emotionally attached to certain companies, you’re more likely to make decisions with your heart rather than with your head, which is not the quickest way to generate profit.
At the end of the day, you buy stock to make money. The danger of becoming emotionally attached to companies is that you might hold onto the stock even when it’s obvious that it’s not a good investment.
1 Believing Investing Is A Short-Term Thing
One of the biggest sins that new traders make on the market is believing that investing in stock is a short-term thing. Too many people see it as a “get rich quick” scheme and hope to get in, make their money, and get out. But it doesn’t work like that.
Making serious money on the stock market is about consistently adding to your portfolio and managing your investments over several years. It’s a long-term commitment and wealth generates slowly as time goes on. The longer you stay committed to your long-term investment plan, the better off you’ll be.