Six Errors to Avoid When Investing

Invest in the Stock Market, yes... but

There are common mistakes that new investors should be aware of before trying to hand-select stocks like renowned investors like Warren Buffett or a shorting like George Soros.

Key Points to Remember:

• Investing can be an exciting way to increase your wealth and secure your financial future.
• However, new investors tend to repeat similar mistakes that can compromise their success.
• Investing emotionally, chasing fashions, stocking up on Penny Stocks and not diversifying are all examples of potential faux pas.

Jump in headfirst

Investment basics are in theory quite simple – buy low and sell high. In real life, however, you need to know what “high” and “low” really mean.

What is considered “high” for the seller is “low” (sufficient) for the buyer in any transaction. So, you see how different conclusions are pulled from the same data. Because of the relative nature of the market, it is important to get started.

At the very least, know the basic parameters such as book value, dividend yield, price-to-earnings ratio (P/ E), etc. Understand how they are calculated, where are their main weaknesses and where these measures have generally performed as a stock or an industry with time.

While you are learning, it is always good to start by using virtual money in a stock simulator. Most likely, you will find that the market is much more complex than what a few ratios can express but learning them and testing them on a demo account can help you move to the next level of education. (Monitoring parameters such as book value and P/E is crucial to investing in value.

Play the Stock Market with Penny Stocks

At first glance, Penny Stocks seem to be a great idea. With as little as $100, you can get a lot more shares in a Penny Stock than a Chip Stock that could cost $50 per share. And, you have much more growth if a Penny Stock goes up a dollar.

Unfortunately, what Penny Stocks offer in terms of size, position and potential profitability must be measured against the volatility they face. Penny Stocks are so named for a reason - they are poor quality companies that, more often than not, will not achieve profitability. And losing $0.05 on a Penny Stock can mean a 100% loss.

Penny shares are exceptionally vulnerable to manipulation and illiquidity. It can also be difficult to get solid information about Penny Stocks, making it a bad choice for an investor who is still learning.

Overall, do not forget to think about inventory as a percentage and not in whole dollars. And you would probably rather own quality stock for a long time than try to quickly make a low-quality business profitable (except for professionals, most returns on Penny Stocks can be drilled to luck).

All-in on One Stock

Investing 100% of your capital in a specific investment is usually not a good thing (even 100% in commodity, currencies, or bond futures). Any company, even the best, can have problems and see its inventories drop significantly.

You have a lot more advantages by deciding to throw diversification in the air, but you also have a lot more risks. Especially as a first investor, it is good to buy at least a handful of stocks. In this way, lessons learned along the way are less costly but still valid.

Borrow to Invest

Using your funds by pulling from a credit margin means that you are borrowing money to buy more stocks than you can afford. This leverage increases gains and losses on a given investment.

For example: you have $100 and borrow $50 to purchase $150 worth of stocks. Should the stock value increase by 10 %, your profit is $15, or a return of 15 % on your capital. On the contrary, should the share lose 10 %, you lose $15, or a loss of 15 %. More importantly, if the stock increases by 50%, your return would be 75 %. But should its value go down 50 %, you lose all the money you borrowed and than some.

There are other forms of leverage than borrowing money, such as options, which can have a limited negative effect or can be controlled using specific market orders, as in Forex. But these can be complex instruments that you should only use once you have mastered the market perfectly.

Learning to control the amount of venture capital comes with practice, and until an investor learns this, leverage is best taken in small doses (if at all).

Invest Money You Cannot Afford to Lose

Studies have shown that money put on the market in bulk rather than incrementally has a better overall return, but that does not mean you have to invest your entire nest egg in one fell sweep. Investing is a long-term business, whether you are a buyer-stakeholder, an investor, or a trader, and to stay in business, you need to have cash flow on the side for emergencies and opportunities. Of course, money on the side does not yield any return, but having all your money in the market is a risk that even professional investors will not take.

If you only have enough cash to invest or if you only have an emergency cash reserve, you are not in a financial situation where investing makes sense. This type of investment leads to making mistakes because of your behavior and biases, and there are more than enough mistakes you can make in the market without putting them at risk.

Rely on a tip !!

Whether it is trying to guess what the next "Apple" will be, quickly investing in a "hot" stock market tip or getting into a shocking earnings rumor, investing in the news is a terrible decision for new investors. Remember that you are competing with professional companies that not only get information as soon as it is available, but also know how to analyze it correctly and quickly.

The best scenario is that you are lucky and keep going until your luck dries up. The worst case is that you find yourself too late (or investing according to the bad rumor) repeatedly before giving up investing.

Rather than following rumors, the first ideal investments are in companies that you understand and with which you have personal experience. You would not keep betting on black at a casino to make long-term profits, so you should not do the same with an investment.

In Conclusion

Remember that when you personally buy stocks in the market, you are competing with large mutual funds and institutional investors who not only do it full-time, but also with much more resources and detailed information than the average person. When you start investing, it is best to start small and take risks with the money you are willing to lose – the market can be ruthless for rookie mistakes. As you become more adept at valuing inventory, you may begin to make larger investments.

It is good to invest on your own and learn more about the markets. But invest in things you know and always favour quality stocks that you want to keep for a longtime. It seems interesting to try to make a quick profit, but like anything else, real money is made by slowly adding up your returns.

Becoming a Confident Investor Requires Skills, not Secrets

There is no magic secret. Becoming a financial investor takes time and dedication. But acquiring professional-level investment skills could help you take control of your financial future. If you are ready to work and learn, we can show you how you can make the right choices in any market, whether it is up, down, or flat.