Just as you wouldn’t make a major purchase without researching the product, you shouldn’t buy and sell stocks without doing your homework. Here are mistakes to avoid:
- Relying on a hot stock tip. You have no way of knowing the source and the tip will usually be lukewarm by the time it gets to you.
- Expecting to make a killing. Even though you may be making a shrewd investment, there are thousands of extremely bright investors who are selling the same stock you’re buying. When you gamble on speculative stocks or try to jump in and out of the market, you’re more likely to lose money rather than make it.
- Buying stock on a hunch. You should thoroughly research every company you intend to invest in.
Just because you love a company’s high-tech products doesn’t mean its stock is a good investment. You need to do much more research before investing in it. As another example, you might love a fast food chain, but that doesn’t mean the parent company is a good investment. The company could be terribly mismanaged and its other restaurants might be losers.
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| Tip: Re-Evaluate Your Investments |
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If you’ve taken physics, you’re familiar with the principle of inertia. Investors are sometimes inert and won’t budge from the stocks they’ve chosen. You can’t just sit on a stock and assume it will do well forever. You need to monitor your portfolio periodically to determine which stocks are performing well and which aren’t. You should also research whether those companies have a bright or bleak future. You shouldn’t hang onto a stock if it is no longer the right investment for you.
The principle of inertia also says that a body in motion will remain in motion. When stock prices start to rise, it triggers a reaction among investors. The result is that demand pushes the prices of stocks beyond what they are worth. At the end of the inertia, the value of stocks fall.
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| Common Mistake: Day Trading |
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Day-trading is engaged in by investors who invest online and hope to capitalize on short-term swings in the market. They hold stocks for hours, not years. Day-traders hope the shares they buy will go up enough for them to make a quick profit (after commissions) and sell before the end of the day.
If you’re just now learning the fundamentals of investing, day-trading is not for you. Many knowledgeable and experienced investors shun day-trading, because they believe investing in the stock market is a long-term proposition. Trying to time the stock market is a difficult if not impossible task. The Securities and Exchange Commission and other regulators warn that day-trading is extremely risky.
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| Common Mistake: Trusting Stock Tips |
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Watch out for faxes, e-mails, and text messages on your cell phone that promise spectacular returns on a particular stock. You may be the target of a pump-and-dump scheme. The sender of the message touts the company to pump up the value of its stock - and then dumps his or her own shares for a huge profit when the price goes up.
Investors who bought based on the hype are left holding shares that typically plummet in value once the person behind the pump-and-dump scheme stops manufacturing interest in the company. Pump-and-dump schemes fraudulently manipulate the stock markets and are against the law.
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