Dangerous Mistakes of Beginner Investors part 2

<< Dangerous Mistakes of Beginner Investors Part 1

Leveraging Up

Leveraging involves borrowing capital for an investment. This is similar to going all in, magnifying your profits, and losses.  Many people only think of the magnified profits, and don’t consider how the magnified losses will affect their capital. Some forms of leverages provide safeguards against losses, such as options, or stop losses. Until you’ve developed a risk plan, and can control your losses, it’s recommended not to leverage your positions.

Using Up Cash Reserves

Generally speaking, investing with a bulk amount of cash has a better overall return than incremental investments with smaller sums of cash. However, this doesn’t mean you should take all your cash, and have nothing left for emergencies, or opportunities that arise. Investing should be viewed as a long-term business. This applies to both buy and hold investors, and traders. Remember that the capital used for investing should be capital that you can afford to lose. If you don’t have enough capital to invest, and have enough left over for an emergency reserve, you shouldn’t be investing until you do.

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Chasing News

A terrible move first time investors can make is trying to guess the next revolutionary product, or follow rumors of amazing earnings. You can get lucky, and continue using this method until your luck fails. Or you can jump in after the price spike, invest in the wrong rumor, and lose your capital until you decide to throw in the towel. Instead of following rumors, first time investors should choose companies you are familiar with, or have personal experience with. This connection makes the time required for research a little easier.

The Bottom Line

When starting out with investing in the stock market, it’s best to start small. Take small risks, and only use the money you are prepared to lose. With a few trades under your belt, you will gain confidence, get better at evaluating stocks, and reading the market sentiment. One this happens, you can start making bigger investments, or start including leverage, penny stocks, trading the news. For now, learn to invest in the stable, familiar stocks within the market, before going into deeper waters.