Making mistakes is part and parcel of investing in stocks. While it may not be possible to avoid making errors at all times, what you can do is learn from the mistakes of others. This way you can reduce unnecessary risks while cutting losses.
Mistake #1: Buying based on Tips and Suggestions from Others
Every investor makes this mistake sometime or other during his investing timeframe. You may come across your colleagues, friends raving about a stock that you have never heard of before. They may even suggest that the stock is likely to make a killer earning sometime soon. You experience the “Fear of Missing Out” and buy this stock without research, only to end up getting burned.
Make it a point never to buy stock based on unfounded tips be it from a person who claims to be an expert or even your close friend.
Mistake #2: Buying Stocks that are Dead Cheap
While it’s true that one of the fundamental guidelines of how to invest in stocks is that “You should buy when prices are low, and sell when prices are high,” if a particular stock is very cheap to be true, then it’s time to raise your caution antennae. Very often, seasoned investors compare the current price of a stock with its 52-week high, and assume that a fall in price indicates a great bargain. But, that doesn’t mean it’s a great deal.
A stock’s price could have fallen for several reasons. Make sure to analyze the underlying causes, before you close the deal.
Mistake #3: Borrowing Money to Invest in the Stock Market
This is one of the deadliest investing sins you can commit. The returns you make on your investment are rendered null by the interest you pay on your borrowings. The worst case scenario is way scarier. Say, you lose out on your investment. This way you have to bear a dual loss. You not only have to bear the loss of investment but also repay both the principal and interest on your borrowings.
Long story short, never borrow to invest in the stock market as you could end up falling into a debt trap.
Mistake #4: Buying Shares in a Business that you do not understand
Very often investors are lured by the latest “hot” stock on the market, without even understanding how the underlying business works. Legendary investor millionaire, Warren Buffet often states that it’s his principle not to invest in stocks which he doesn’t understand the business. This prevented him from investing in numerous stocks that didn’t survive the dot-com crash, thereby protecting his assets.
Make sure that you have a thorough understanding of a particular business, at least the overall functions if not the technical details before you invest.
Mistake #5: Panicking
This is one must follow advice for all investors, who are looking to invest in stocks – don’t panic. Markets are bound to rise and fall. Over time, they are likely to stabilize and correct themselves. This is the cyclic nature of the stock market. So, don’t panic and do things that you usually won’t do. Never sell or buy in a rush, because you feel that something bad or good is about to happen.
The stock market is undoubtedly one of the best investment options to grow your wealth. With that said, you need to take a few steps, stay alert and stick to your investments to emerge victorious in the long run. Above all, learn from the mistakes of others, so that you don’t repeat them.