If you’re new investor to the world of investing, you’re in for a wild ride. The stock market can be confusing and complex – and that’s just the beginning. There are a lot of things to learn if you want to be successful as an investor, and it’s not always easy to know where to start. But don’t worry, because I’m here to help. In this article, I’ll outline five things that new investors should avoid doing.
By avoiding these common mistakes, you’ll be on your way to becoming a savvy investor in no time. But before we get into the specifics of what you should and shouldn’t do, let’s take a step back and look at the big picture.
What does it mean to be an investor?
An investor is someone who commits money to something with the expectation of making more money in the future. In other words, investors are looking for opportunities to make their money work for them.
But as any experienced investor will tell you, this isn’t easy. It takes time, effort, and a lot of research to find sound investments – and even then things don’t always go according to plan.
So new investors, here are the 5 things you should avoid doing, so you can increase your chances of making smart investment choices in the stock market.
1) Don’t expect to get rich quick
I’m not going to lie to you: if you’re looking to make a quick buck in the stock market, you’re in for a disappointment. Sure, there are stories of people who made a fortune overnight by investing in the right company at the right time, but those are rare exceptions. For the most part, stock investment is a slow and steady game that requires patience and discipline.
I know it may seem like there’s a shortcut for everything in life, but when it comes to investing, there simply is no quick and easy path to success. It takes hard work and dedication – and that’s something you should be happy about. Because the more time and effort you put into your investments, the better off you’ll be in the long run.
You should consider your age, income, and risk tolerance before investing any of your money in stocks. It is also important to understand what kind of investor you are: aggressive or conservative? There’s no right answer to this question; it depends on how much time you have until retirement, what type of investments make sense given your other circumstances (e.g., if you have an estate), and so forth.
Remember: As a general rule of thumb, think about investing for your future self, not simply now. Do not start off your hard-earned money with high risks stocks—at least until you have learned more about the subject matter.
2) Find out what you don’t know
When it comes to investing in the stock market, new investors often don’t know where to start. This is completely understandable – after all, the stock market can be a complex and confusing place. But that’s why it’s so important to do your research before you invest any of your money.
The first step? Finding out what you don’t know.
For example, one way to learn more about stock investment is by studying the P/E ratio. This is a measure of how much investors are willing to pay for a company’s earnings. In other words, it shows how much investors believe a company is worth.
The P/E ratio can be found by dividing a company’s share price by its earnings per share (EPS). For example, if a company’s share price is $10 and its EPS is $1, then the P/E ratio would be 10 ($10 divided by $1).
The higher the P/E ratio, the more investors are willing to pay for a company’s earnings. So a high P/E ratio indicates that a company is doing well. This is just one small part of the investment basics. Once you have a good understanding of the basics, you’ll be in a much better position to make informed investment choices. So don’t be afraid to ask questions and learn as much as you can about the stock market.
Remember: The more you know, the better your chances of earning a good return on your investment. I highly recommend you to read the book on: How to Turn $100 Into $1,000,000: Earn! Save! Invest! to kickstart your investing journey!
Important: In March 2022, I'll be starting Million Dollar Portfolio Challenge where I start out with an initial $1000 investment. What you will find in this challenge? > Full access and transparency to my weekly investment/trades via newsletter (directly sent to your email) or through DigestVerse for free! Stay tuned!
3) Don’t fall in love with your stock
The biggest mistake I see new investors make is buying a stock because they like the company. I know there are lots of great companies out there, but that doesn’t mean their stocks are a good investment. I know this seems counterintuitive, but the best way to invest is not to buy great companies…
It is to buy GREAT STOCKS.
Not all great companies are great investments. There’s a difference between being bullish on a company and bullish on a stock. Let me explain what I mean…
You see, one common misconception among investors is that you should buy a stock because you like the company. And while it’s true that there are some great companies to invest in, just because a company has a solid reputation doesn’t mean its stock is a good investment.
Whenever I talk about this with people, many of them get confused. They think I’m saying you shouldn’t invest in solid companies — and that isn’t what I’m saying at all.
I’m saying you shouldn’t invest in solid companies if their stocks are overvalued.
There’s a big difference between being bullish on a company and bullish on a stock. A strong company does not necessarily make for a strong investment… and vice versa. For example, consider one of the biggest names in transportation mobility as a service company, Uber Technologies, Inc (UBER).
That’s INSANE, negative 14.29%…
You see, you should never buy a stock just because you think it will do well. You may want to buy the stock because you think it’s undervalued, but if you can’t explain why it’s undervalued, you’re probably not getting the full picture.
Remember: As Warren Buffett always says, “price is what you pay; value is what you get.” So before you decide to invest in a new stock, especially one that’s new to you, carefully consider its price versus how it’s valued by Wall Street analysts who do nothing but research these things.
4) Don’t pick a stock because it has a great story or a celebrity endorsement.
The same goes for stocks recommended by your friends or family. New investors are too easily influenced by the loudest, most confident voices in the room. If you have a friend or know someone who’s bragging about their stock picks, that’s a good indication you should be going in the opposite direction.
The best stocks to buy right now aren’t getting headlines. They aren’t favorite picks of Jim Cramer or other market gurus. They aren’t exciting stories with crazy endorsements, like the infamous “Nikola Motors (NKLA)”, which has been hyped.
Don’t fall into that trap. The most successful investors are those who think for themselves, not those who just go along with the crowd.
So stop doing this and start picking stocks like a successful investor:
- Doing thorough company research and financial statement analysis.
- Being objective and unemotional about your investments, not emotional and overconfident.
- Being patient with your investments and letting them grow for the long term.
- Avoid high-risk stocks like those with new technology.
Remember: New investors are too easily influenced by the loudest voices in the room.
5) Buy low and sell high
The best piece of advice I’ve heard is also the hardest: Buy low and sell high. It sounds obvious, but it’s actually very difficult to do.
Let me explain why it’s not advisable for new investors.
Many people think the key to making money in the stock market is to “buy low, sell high.” While that may sound like a winning strategy on the surface, it’s not. It’s called speculation. In fact, it’s a recipe for disaster.
The problem with trying to “buy low and sell high”
They’re usually low for a reason. Investors are concerned about the company’s prospects and are selling off their shares. The stock price reflects this pessimism. And as an investor, you don’t want to put your money into companies that aren’t going to perform well.
It’s not easy to buy a stock because it’s cheap and then wait for it to go up. The market has already decided there isn’t much reason for it to go up — so why should you have confidence that it will?
Here’s the thing: You don’t have to buy low. You just have to buy at a fair price. A fair price is one that reflects the company’s actual value and prospects for growth, not its recent performance in the market.
Conclusion
The old saying is true: knowledge is power. Before you make any decision, however small, stop and assess all the elements that could affect that decision. You’ll likely find that you’ll feel better having made a fully-informed choice. If you’re new to investing, do some research and read a few articles on basic stock investments before putting your hard-earned money into the market.
There are multiple pieces of advice for every aspect of investing—make sure that the advice you heed is sound and based on facts before you make your choices.
I personally recommend learning from Investopedia, it’s free and has every piece of information you need.
Disclosure: Some of the links in this post are affiliate links and if you go through them to make a purchase I will earn a commission. Keep in mind that I link these companies and their products because of their quality and not because of the commission I receive from your purchases.