Dangerous Mistakes of Beginner Investors

The past couple of decades have seen a rise in the number of discount brokers online. Now days, anyone with access to the internet, and some money in their bank account can start trading stocks. This has enabled many people to invest in stocks who couldn’t have before, before the days of the internet. This has encouraged people to invest in stocks rather than relying on mutual funds, or managers. However, there are some common mistakes first time investors should be aware of before diving in head first.

Jumping In Head First

The idea of buying low, and selling high seems simple enough. However, the reality is knowing what is high, and what is low is alot more complex. Everything is dependent on how different people interpret different ratios and metrics. The same graph, given two to different people can result in two totally different analyses. One person can come to the conclusion that it’s a perfect buying opportunity, whilst another person may interpret it as a perfect selling opportunity. Because of the relative nature of the stock market, it’s important to learn as much as you can before getting your money involved.

The three most basic metrics investors should know are: book value, dividend yield, and price-earnings ratio (P/E). Understand what they are, how they are calculated, and what their weaknesses are. While you are learning, and gathering information, this is the best time to paper trade the stock market. There are many online stock simulators that will track your paper profits for you. Hopefully while you are learning the basics, you will get a feel for the stock market, and its high level of complexity.

Buying Penny Stocks

penny stocks
From a first glance, penny stocks appear to be a great idea. The initial investment can be quite low. $100 can buy you alot more than a blue chip stock costing $50 per share. A $1 rise in the blue chip share might give you a 2% return, but a $1 rise in the penny stock can give you a 100% return. However, there’s a reason these stocks are so cheap. Their high volatility, and illiquidity should be a major consideration before buying penny stocks. Sure, they can double in price overnight, but they can also crash within mere moments. Also consider the amount of activity on a penny stock. Are there enough buyers if you wanted to unload your stocks later on?

Investing all your capital

Surprisingly, the number of people who invest 100% of their funds in a specific market is quite high. It its never a good move to put all your eggs in one basket. Whether it is the stock market, futures, forex, or bonds. The rule continues to apply. Even if you throw diversification out the window, it’s best to risk a little bit of your capital at a time. The lessons you learn along the way will be the difference between adjusting your trading strategy, throwing in the towel, or saving up for another stint at stock trading.