Investing Mistakes a Newbie Should Avoid
There are lots of newcomers to the investing scene, and unfortunately lots of mistakes are being made which are costing new investors lots of money. Lots of new investors are enticed by stories of financial gain without lifting a finger, making them think that it is easy to do. Investing with this mindset is dangerous; the risk of losing money in the stock market is very real. During a market retracement, new investors dealing with more than 10 percent loss in equity value would usually rationalize that investing in stocks is a long-term affair. Although someone investing in equities should have a long-term view, seasoned investors know when to cut losses. To avoid dealing with sizable losses early in your stock investing career, here are a few tips to help keep you on track.
Emotionally Compelled Investment
Someone new to the excitement of the stock market may not be emotionally equipped to handle the powerful surge of emotions that comes with a stock hype. The hype is usually related to a development in a company which has had dormant stock for some time, triggering new investments. Over a short period of time, lots of people start investing in the company due to the hype surrounding its stock, causing the stock price to rise rapidly. When this happens, newbie investors are no doubt intrigued by the stock increase, but at the same time, are still unsure about investing and often refrain due to fear. As the stock continues to increase, more and more newbie investors start to buy stock, but what they don’t realize is that the stock can, and often does, drop just as quickly as it has risen – leaving the newbie investors out of pocket and wondering what went wrong.
This situation happens all the time so if you are a new investor, never let your emotions get the best of you. If you’re going to invest in a breaking stock, make sure you do it early, don’t leave it until the stock is already up a larger percentage, as the fall will not be far away. If you can invest at the start of the hype, you have a greater chance of selling your stocks as the hype peaks, and cashing in before the stocks start to fall again.
No Entry and Exit Plan
Newbie investors would sometimes buy stocks because of their broker’s recommendations. Unfortunately when things go south, they are left to fend for themselves.
Failing to prepare is preparing to fail so if you are a new investor, plan the price of your entry and exit. It is very important that you stick with this plan and never hesitate to cut your losses. You can always regroup later.
Investing in One Stock
New investors can also be extremely conservative and only invest in one stock. No matter how fundamentally sound a company may seem, you can never be too sure. It’s much wiser to invest in a few different stocks, rather than putting all of your money into one stock.
In the late 90s, Enron was a very sound company, posting massive revenues, but we all know what happened a few years later: the company went bust.
If you are really conservative, you can buy the best performing stocks of each sector. Should one stock break down, you have other stocks that can cover your losses. Don’t keep all of your eggs in one basket.
Investing on Breaking News
Newbie investors often associate headlines with stock price movement. Seasoned traders understand that a positive development would only affect the price of the company’s stock if the factors are already in place. In other words, breaking news would only serve as the trigger and not the primary factor for stock price movement. Unfortunately, those who are new to stock investing impulsively buy on earnings or expansion reports.
There’s a possibility for the stock to rally for a day or two because of an eye-catching headline; the reason behind this is because the stock market is full of impulsive buyers. However, clever traders are hoping for this situation so they can dump their shares to their unwitting victims.
Unless you know how to read charts and you can be sure that the positive news could trigger a breakout, do not call your broker based on what you have read on the paper.
Summary
New investors are sometimes victims of their own greed or fear, which makes them forget that investing in stocks is risky business. To avoid heavy losses early in your investing career, never let your emotions get the best of you, plan your entry and exit strategies, never put all of your eggs in one basket and never buy based in breaking news alone.
Author Bio
Donny Gamble is a published Amazon author who graduated from The Ohio State University with a proven track record of growing online businesses. He runs his own Personal Finance blog at Personalincome.org, and has been featured on Yahoo Finance as well as other personal finance websites.
Category: Investing
