Common Mistakes New Investors Should Avoid
When you finally have some savings building up, you might be excited to start finding ways to make your money work for you, instead of being a slave to the almighty dollar. Unfortunately, this enthusiasm can lead to some costly mistakes if you’re not careful from the start.
Investing is an exciting and potentially profitable venture, but as with almost anything in life: where there is profiteering, there are scammers and mistakes. To help you avoid these costly errors, however, the following guide will help kick start your investing without making you spend a dime.
Image by William Ng
Investing without First Educating
Obvious though this may seem, too often people jump into investing without learning the basics first. Why put your money into something you don’t fully understand? As we can see from the next point on our list, some people get a stockbroker to handle the confusing aspects for them, but this isn’t always the best solution. Paying someone a lot of money to teach you is not necessarily in your best interest either.
So what should you do? Simple: start with a book. Read a basic book on investing: what it is, how people decide what to invest in, and how the whole process generally works. It’ll cost less than $20 or so (free if you find a decent book at the library), and once you’re armed with the basic knowledge, then you’ll feel more confident in getting started in small-scale investments.
Immediately Getting a Stockbroker
This can be problematic in several ways. One is that you may not feel confident that the stockbroker is acting in your interest at all times; perhaps you would rather remain in control of your own investments. Some stockbrokers charge a flat fee for their services, which can be troublesome because then there is no incentive for the stocks or mutual funds to perform well. Either way, the broker gets paid.
Commission-based brokers will be motivated to get you good stocks, but may also encourage you to make further investments in something that’s becoming “hot” (see the fourth point on this list). This is, of course, not the only practice, but it does sometimes happen when brokers seek to maximize their commissions. As you’re just starting out, you might choose to stick to smaller investments that you have thoroughly researched yourself.
Emotional Investing
Emotional investing is where an individual buys a stock because they have a connection to the company. Regardless of why you may like a certain company, it’s typically recommended that you stick to what’s performing well on the stock market, rather than what you like. Why? Because even if your favourite company’s stock is currently performing well, it would be quite difficult for you to break away and cut your losses if the stock prices begin to fall.
Investing is a business game, not an emotional one. Keep that in mind when getting involved in this venture.
Going for “Hot” Stocks
“Hot” stocks are those that rapidly increase in value over a short period of time. They may seem like a good choice for investing, but this boom is often followed by a bust. If you don’t pull out of the market and collect your earnings in good time, then you could potentially lose it all in a bust.
Think carefully about whether you want to subject yourself to such volatility in the markets when you’re a beginner; you could choose instead to start with safer, less-risky investments in order to protect yourself and your finances.
Of course, what you choose to do with your money is your business, but hopefully with the above tips, you won’t make any major mistakes when you’re first starting out.
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Category: Frugal Living
