Before first-time investors try to choose well-known investors like Warren Buffett or short stocks like George Soros, they must be aware of some common mistakes.
6 dangerous moves for first-time investors
- Investment can be an exciting way to increase wealth and secure a financial future.
- However, first-time investors often repeat similar mistakes, which can undermine their success.
- Emotional investing, chasing fashion, buying low-priced stocks, and failing to diversify are all examples of potential mistakes.
- When you start investing, it is best to start small and take the risk with the funds you are prepared to lose
The basis of investment is very simple in theory-buy low and sell high. However, in practice, you must know the true meaning of “low” and “high”.
In any transaction, what is “high” for the seller is “low” (sufficient) for the buyer, so you can see how to draw different conclusions from the same information. Due to the relative nature of the market, it is important to understand this before entering.
Basic indicators such as book value, dividend yield, and price-to-earnings ratio (P/E) are the basic items that need to be learned. Understanding how they are calculated, where their main weaknesses are, and over time, these indicators are often used for the position of stocks and their industries, which can greatly help new investors.
While learning, it is always good to start using virtual currency in the stock simulator. Most likely, you will find that the market is much more complicated than a few ratios can express, but learning these ratios and testing them on a demo account can help you move to the next stage of research.
Play cheap stocks and fashion
At first glance, penny stocks may seem like a good idea. For just $100, you can get a penny of stock, not a blue chip stock that might cost $50 per share. If a penny stock rises by one dollar, you have more room to rise.
Unfortunately, the performance of penny stocks in terms of position size and potential profitability must be measured in terms of the volatility they face. There is a reason why low-priced stocks are low-priced stocks—they are poor-quality companies that, under normal circumstances, do not generate profitability. Even a loss of $0.50 on a penny stock may mean a 100% loss.
Penny stocks are particularly vulnerable to manipulation and insufficient liquidity.
In general, remember to consider stocks in terms of percentages rather than entire dollar amounts. And you may prefer to hold quality stocks for a long time, rather than trying to make quick profits on low-quality companies (except for professionals, most of the returns on low-priced stocks can be attributed to luck).
Go all out with an investment
It is usually not a good idea to invest 100% of your capital in specific investments (even if 100% is invested in specific commodity futures, foreign exchange or bonds). Even the best companies may encounter problems and see their stock plummet.
Investors decide to give up diversified investment has more benefits, but it also brings more risks. Especially as a first-time investor, it is best to buy at least a few stocks. In this way, the lessons learned along the way are less costly, but still valuable. Exchange-traded funds (ETFs) are a great way to get a wide range of investments.
Utilizing your funds by using margin means that you borrow money to buy stocks that are beyond your means.Use leverage to magnify gains and The loss of a given investment.
For example, suppose you have 100 USD and borrow 50 USD to buy 150 USD stock. If the stock rises by 10%, you earn $15, or your return on capital is 15%. However, if the stock drops by 10%, you will lose $15, or a 15% loss. More importantly, if the stock rises by 50%, you will get a 75% return. But if the stock drops by 50%, you will lose all the money you borrowed, plus some.
In addition to borrowing money, there are other forms of leverage, such as options, which have limited downside or can be controlled by using specific market orders. However, these can be complex tools that you can only use after you have a complete grasp of the market.
Learning to control the amount of venture capital requires practice, and it is best to use leverage in small doses (if any) before investors learn to control.
Invest in cash you can’t lose
Research has shown that large amounts of cash, rather than incremental inputs, have a better overall return, but this does not mean that you should invest all your savings at once.
Whether you are a buy-and-hold investor or a trader, investment is a long-term business. To maintain business development, you need cash to prepare for emergencies.
If you only have enough cash to invest or have emergency cash reserves, then you will not be able to invest financially. Due to behavioral bias, this investment can lead to errors.
Follow the news
Whether it’s trying to guess what the next “Apple” will be, quickly investing in “hot” stock tips, or going all out to predict the rumors of earth-shaking returns, investment news is a terrible move for first-time investors. Investors Competing with professional companies, these companies not only obtain information when it is available, but also know how to properly analyze this knowledge and take action.
The ideal first investment is not to listen to rumors, but to invest in companies that you know and have personal experience. You will not continue to bet on black in the casino to make long-term profits, so you should not do anything equivalent to investing.