If you’re not familiar with investing, it’s easy to think that the biggest mistakes are all about picking the wrong stock, and buying or selling at the wrong time. And it’s true, those kinds of mistakes can be costly. But the biggest errors that beginner investors make are more fundamental, and are often about their investment strategy than what investments they actually make. Avoiding these five mistakes won’t guarantee success—in stock trading nothing is a guarantee—but it will help you avoid expensive errors in judgement.
If you’re new to investing your goal might be to simply make money. But when you’re thinking about an investment strategy it’s wise to start by considering what you plan to do with that money. Are you saving to buy a house, for instance, or wanting to put money away towards retirement? Whether you have short, medium, or long term goals will inform the kind of investment strategy you choose, so this is an important consideration.
Cheap stocks may look like a great deal, but when you’re investing it’s vital to consider value as well as price. A low-cost stock isn’t necessarily a good one to invest in, even if it’s offering a high return. If that stock represents a highly risky investment, it may not be as valuable as one that’s more expensive with a lower return. Similarly, a high-priced stock can be a good buy if it offers an opportunity for a low-risk ROI, or if it’s paying good dividends.
Considerations such as price versus value are just one reason why it’s important to do your homework before making an investment. A cheap stock may look like a good buy, but if it’s cheap because the company is failing, you risk wasting your investment. Wherever you choose to put your money, it’s always important to research the company first.
Every time you buy or sell a stock, you pay a trading fee or brokerage fee. That means the more you buy and sell, the more fees you pay, and the less you actually earn in profit.
Some traders make frequent trading part of their overall strategy, and factor in the amount they pay in fees into their calculations. This short-term strategy can definitely pay off, but if you’re going to buy and sell frequently, don’t forget to factor in the fees, or you may find you’re losing money rather than making it.
If you have £5,000 to invest, and you put it all in one stock, you’re taking on a huge risk, no matter how safe that particular stock might be. If the company fails, your money is gone. No matter what kind of investments you’re making, diversification is always of key importance. Making multiple investments allows you to spread your risk around, and protects you if one of them should lose money.
