Before trying your hands picking stocks, there are certain common mistakes you must be aware of as a first-time investor. Shorting like Soros or picking stocking like renowned investors like Buffett is not as easy as it may sound.
1. Don’t jump in head first
In theory, the basics of investing sound quite simple – sell high and buy low. Though when practicing in real, you must be aware of what the terms ‘high’ and ‘low’ really imply. What is ‘high’ for a seller looks too ‘low’ for a buyer. So, the same information can give different conclusions. Due to this relative nature observed in the market, it is necessary to learn before jumping right in.
The least of all, you must be aware of the basic metrics which include the P/E ratio, dividend yield, the book value, etc. You must understand how these metrics are calculated, what they mean and how you should act in the market as per these metrics.
2. Don’t play penny stocks and Fads
At the first look, penny stocks look more or less like a great idea. With an amount as low as $100, you can invest. In fact, you can receive a lot more shared than a blue chip which might cost $50 a share. Also, if a penny stock goes up by a dollar, you have a lot more upside. Yet, it is unfortunate that what penny stocks offer in terms of potential profitability and position size must measure against the volatility they are subject to.
These are poor quality companies, hence termed as penny stocks. More often than not, they do not work out profitability. Moreover, losing $0.5 on a penny stock may mean a loss of 100%.
3. Don’t go all in with One Investment
It is usually not a very good idea to invest 100% of your capital in a specific investment. Even the best companies may face issues which will affect their stocks eventually. A decline in their stocks will lead to losses for you. You can in fact have better profits by diversifying your portfolio.
Especially when you’re an amateur investor, it is good to have at least a handful of stocks.
4. Don’t Leverage Up
Borrowing money to buy more stock than you can afford is the meaning of leveraging your money by using a margin. On a given investment, leveraging can magnify gains but also lead to huge losses. Besides borrowing, there are other forms of leveraging like options.
Their downside is limited, but they are complex financial instruments. You must only use them once you have a good grasp on the market.
5. Don’t Invest Cash you cannot Bear to Lose
As per various studies, cash which is put in bulk, into the market incrementally offers better returns. However, this does not imply that you must invest necessary resources in the market. The market investments are volatile and if you cannot afford to lose a certain amount of money, it is advisable not to take the risk.