If you are interested to start beginning investing, the stock market can offer tremendous returns on your investments. However, it is of utmost importance that you don’t just pick a stock(s) and buy it. Most people who do this see their investment declining in value and thus making a loss.
Beginning investors can learn from mistakes that experienced investors have made so they can avoid the common pitfalls associated with investing in the stock market. We will refer to each experience with a pitfall as a “Stock Market Lesson” since it’s basically a lesson about what not to do while stock trading. Below you will find each stock market lesson with the reasoning behind it (including some lessons which come from the most successful investor in the world, Warren Buffet).
Stock Market Lesson
Diversify your investment: Don’t put all your investment money in one stock since you end up taking an immense risk this way. You never know when a company will go down and take your investment with it. By diversifying your stock portfolio you spread your risks between a few businesses and become more secure against a sudden downfall of a particular stock. However, it should be noted that over diversification can also reduce your investment gains.
Take action: Stop procrastinating and take action already. You don’t need to become an expert at the stock market or know all the different terms and possibilities of it before buying stocks. It is easy to get overwhelmed by all the information available about this subject and become a victim of analysis paralysis (over-analyzing a situation, so that a decision or action is never taken).
Don’t invest before paying credit card debt: Buying stocks while having credit card debt is not going to help you to reap the benefits of your investment. It is usually more profitable to pay off your credit card debt first since the interest rates associated with the debt are often higher than the amount of interest you will gain from your investment. Beginning investing after paying your credit card debt is highly recommended.
Don’t let your emotions guide you: Being emotionally involved while buying/selling stocks can wreak havoc with your investment. Fear and greed are the most common causes of losing money with your assets. Don’t sell your stocks just because they are worth half than they were when you bought them. To make a profit you need to buy low and sell high, the opposite will result in a loss. Every stock has its downward and upward trends and most of the time it will increase in value in the long-term. Another mistake is being too greedy and invest a big amount of your investment in a particular stock just because you heard that the stock value is about to increase tremendously. Because when the opposite happens you will harm your investment vastly.
Invest money that you can afford to lose: Although you can minimize the chances of losing money in the stock market by reading the information on this website and applying it, there is always a chance that you will buy a stock from a company that will go bankrupt and take your investment with it. This won’t be such a big deal for you (now that you have read about diversifying) unless you have invested money that you really need at the moment. Only invest with money that you won’t need in the short-term and can live without for a while.