Entering the stock market for the first time is both exciting and intimidating. Once you’ve achieved the basic foundations of financial stability, it’s a popular and potentially lucrative investment vehicle you should strongly consider adding to your portfolio. But there are a number of common mistakes new stock investors make that can greatly hinder your ability to generate a profit.
So, take a look at these mistakes new stock investors make and be careful about repeating them yourself. Just steering clear of these goes a long way toward getting off to a successful start in this new investment endeavor.
Typical Mistakes New Stock Investors Make
- Investing money that’s better spent elsewhere – Notice we mentioned first establishing financial stability above. If you have high-interest credit card or loan debt, the interest costs you more than you’ll earn in returns from the stock market. It makes much more financial sense to pay off debt before buying stocks. Also, you should have an emergency savings fund and a basic rate of regular saving before you start investing.
- Not bothering to set investment goals – Goals are part of a successful investment strategy. You should know exactly why you’re investing and what your timeline is to get there. Parents investing to build their middle school-aged child’s college fund need a different investment portfolio and strategy than a 30 year old starting to invest for retirement.
- Investing in companies they don’t understand – One of the most common mistakes new stock investors make is buying into areas they don’t know about. You’re much likelier to find success buying stock in companies that are in industries you’re well acquainted with, and whose products or services you have a solid grasp of.
- Buying stock without reading the 10-K – Most companies must file a 10-K with the SEC each year. It’s full of information that informs investors about the company’s financial prospects in the near future, and whether it’s a smart buy. There’s also a shorter quarterly version called a 10-Q. Don’t buy a company’s stock without reviewing this information first.
- Making emotional investment decisions – Investing in the stock market easily leads new investors to highs of excitement and lows of despair. These in turn lead to poor investment decisions. Have a plan, rely on hard information like is found in 10-Ks and 10-Qs, and be disciplined enough not to buy and sell based on momentary emotional states.
- Trading their stocks too frequently – There’s plenty of historical data to show that, in general, holding onto stocks for longer terms provides greater returns. Buying and selling often, constantly trying to time the market, introduces more volatility and risk, and this strategy usually yields lower returns.
- Holding onto a loser for too long – Despite the above point, sometimes new stock investors hold on because they can’t stand the idea of losing money and are determined to at least break even. This can lead to greater and greater losses, and it also causes secondary losses in that you could be investing that tied-up money more successfully elsewhere.
- Buying stock with a margin account – Margin accounts allow investors to borrow money from their brokerage, but it introduces significantly more risk and even creates the opportunity to lose more money than was invested. While margin accounts have their uses and benefits, they aren’t generally a good idea for new investors.
- Not diversifying their portfolio – Everyone’s heard the cliché about needing to diversify your portfolio, and it’s certainly true. It’s never a good idea to have all your eggs in one basket. Putting your money into stocks from various industries and into a range of different investment vehicles beyond stocks is a fundamental part of minimizing your risk.
