The 10 biggest mistakes for beginning investors. Avoid them!
Updated: 5 days ago
Author: Monika Zeminová
Date of Publication: 30/08/2022
If you are new to the financial markets this article is for you! Investing in stocks is becoming a more popular way to make money. Every year thousands of new investors are trying to succeed on the stock markets. Unfortunately, many of them keep repeating the same rookie mistakes. So what are they?
1. Buy expensive and sell cheap
Fear and greed motivate the most beginning investors. That's why they buy at high prices when markets are rising for short-term profit. Conversely, they sell cheap when markets fall because they are scared of sudden losses. But instead they should focus on long-term profits and not deal with short-term fluctuations.
2. You let your emotions take over
Ups and downs are a normal part of investing, as the occasional loss of money is. When that happens, it's usually best to do nothing. The stock market can be volatile in the short term, but over the long term it tends to go up. You will probably get back what you lost if you have invested reasonably.
However, if you sell your investments when they are falling, you will lock in your loss. You can invest your money elsewhere and try to make a profit on something else. Yet if you sell every time the value of a stock falls, you are unlikely to do well.
But in some cases, it's better to sell the stock. If it hasn't done well for several years or its management is making ill-advised decisions, it may be the time to take the stock out of your portfolio. But a bad quarter is nothing to get too upset about.
3. You forget about inflation
Many people think their money is safe in checking and savings accounts at the bank. The opposite is true. If you leave money sitting in these accounts, your money will lose value. And that is because of inflation. You simply buy less with the same money.
If you already invest your money, don't forget to cut your profits by inflation and fees. That way you will make a net, i.e. real profit. If your return is 8%, but inflation is 5%, then the real return is only 3%.
4. You want to get rich overnight
When someone offers you an investment in something very profitable in a short period of time, always keep in mind that with high returns comes high risk.
5. You believe that historical profits guarantee future profits
It would be nice, but unfortunately it doesn't work that way. Historical profits can help you determine the riskiness of a product and predict future profits. However, they will never guarantee future performance.
6. You don't pay proper attention to the fees
One of the biggest mistakes a novice investor often makes is not taking fees into account. They see high returns, low risk, easy availability of money... and then they're surprised to find they're paying a fee to enter and invest the money. You should be concerned not only about the return and risk of the investment, but also about the fees charged by banking institution etc.
7. You don't diversify enough
Never put all your eggs in one basket. It doesn't matter if it's Microsoft stock, Bitcoin, gold or real estate. It's always extremely important to never have all of your funds invested in one product. This is because if anything were to happen to the investment, all your savings are gone. The absence of any diversification is one of the biggest investment mistakes novice investors make.
8. Investing in companies you don't understand
Investing in companies you don't know can be risky, even if the company is a leader in its field. When you don't know how a company makes money, you have a harder time predicting how its decisions will affect the performance of its stock. However, when you understand how a company operates, you can more easily spot red flags that may signal a potential downturn.
9. Trying to time the market
Trying to time the market means trying to buy when the stock is at its lowest point and sell when it is at its highest so that you can make a decent profit. It sounds like a great strategy, but it is almost impossible to know when a stock has reached its highest or lowest price. If you guess wrong, you could lose a lot of money. This can happen especially if you put a substantial amount of your savings into one stock.
10. Profit is only real when it is in the money
Your investment is only successful after a successful sale. Although a stock in your
portfolio will appreciate significantly, in theory it could lose its value at any time. The true measure of a successful investor is money earned, not a well-valued open stock portfolio.