The stock market is an exciting place that provides us with unlimited opportunities to grow our wealth and invest in businesses that we truly believe in. That being said, there are plenty of pitfalls around every corner for first-time investors to look out for. As a new investor, it’s important to remember that you are competing against huge mutual funds and institutional investors that have lots of resources and experience. There is no substitute for hard work and knowledge.
It’s easy for new investors to fall victim to some costly mistakes as they try to get up to speed with how the stock market works and what the right approach to investing is. We want to help you avoid making expensive mistakes in the market and begin your investing career the right way. That’s why we’ve put together the following list of 4 common mistakes for first-time investors to avoid.
Mistake #1 - Starting with Penny Stocks
A penny stock is a stock of a company that trades at $5 dollars or less per share. Penny stocks are usually small companies that trade via Over the Counter (OTC) transactions instead of on major exchanges like the New York Stock Exchange and NASDAQ. Since shares of penny stocks are offered at such low prices, plenty of beginner investors are attracted to them. They think that their potential for big gains is greater since they can pick up larger quantities of penny stock shares instead of paying for shares of an established blue-chip stock at a higher share price.
It’s true that penny stocks can potentially provide big gains, but they can also lead to massive losses. They are usually low liquidity stocks, meaning that there aren’t a lot of buyers and sellers of the penny stock’s shares. This leads to high bid-ask spreads, extreme volatility, and a high level of risk. These companies also typically don’t have a lot of public financial history for investors to look over. The bottom line is that penny stocks are usually highly speculative investments that are best for people with a high level of risk tolerance. Keep that in mind before you decide to start splashing your hard-earned cash on a penny stock.
Mistake #2 - Waiting Too Long to Invest
Another big mistake for new investors is waiting too long to make their first investment. There are a variety of reasons why people wait to invest. Sure, it makes sense to pay off high-interest debt like credit cards before you put money into the markets. Just keep in mind that the longer you wait to start building your investment portfolio, the more you miss out on the magic of compounding and long-term market gains. These are two crucial concepts of making money in the stock market that a lot of new investors aren’t familiar with.
If you are trying to wait for the next big “crash” to invest, remember that it is extremely difficult to figure out when that will occur. Many professional hedge fund managers and financial advisors have difficulties timing market tops and bottoms. Instead of perpetually sitting on the sidelines, try to commit to a regular investing plan that allows you to compound your gains carefully over the long term.
Mistake #3 - Putting All of Your Money into One Stock
Successful investing is not easy. It can be quite difficult to pick individual stocks that are winners. If you want to find great opportunities, you will need to do some hard work and research. Sometimes, new investors fall victim to the mistake of putting all of their money into a single stock. They don’t fully understand the concept of diversification and therefore put their entire portfolio at risk. Investing all of your money into a single stock means that your investment success is tied to the performance of a single company. If certain market factors and volatility hit that company particularly hard, you will bear all of the downside risks.
Instead of making this mistake, try to invest in a diversified portfolio. You can explore assets like ETFs, stocks, REITs, and bonds to create a portfolio that limits your risk and provides nice gains over the long term. The more diversified your portfolio is, the lower your exposure is to the inevitable ups and downs of the market.
Mistake #4 - Investing Money You Can’t Afford to Lose
The last mistake we are going to discuss is when new investors put money into the market that they can’t afford to lose. It is vital to understand the risks involved with investing before clicking that buy button. Take a look at your overall financial picture before you start investing to avoid putting yourself in an uncomfortable position. Always make sure you are ok with the downside of an investment before you decide to invest.