The “investing bug” bit me when I was 11 when I found out that I could be an owner in Wendy’s (WEN) by buying a stock. Back then there weren’t online brokerages and the account minimums were very high, so it was nearly 10 years later before I started buying my first stocks. I love capitalism and investing, but it does come with risk.
In my twenty-plus years of investing, being an advisor and market researcher, there are several common investing mistakes I see people make when they begin to start. Both new and experienced investors often ask, “What are common investing mistakes people make.” The short answer is investment fraud, falling for stock hype, being impatient, too much risk and leverage, and trading in markets they don’t fully understand like futures, forex, and options.
Sounds simple, but a little confusing? Let me break it down further for you.
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How to Avoid Investment Fraud
Rule 1: If sounds too good to be true, it is most likely a scam. I don’t know how many times I have been contacted by someone that has been emailed a Nigerian prince that wants to give them 30 million dollars to safeguard them. Run, Do Not Continue Communication.
Rule 2: Only Buy Investments On US Regulated Exchanges. New investors need to stick with investments that are listed on a stock exchange. Do not buy non-traded REITs, private placements, or someone’s uncle’s investment fund. The bottom line, if it does not have a stock symbol, don’t buy it.
Rule 3: Consult an Investment Fraud Lawyer or Financial Advisor. There is nothing wrong with getting a second opinion. Most investment fraud lawyers and financial advisors will look over an investment free of charge.
Falling For Stock Hype
It is very hard for both new and experienced investors not to fall for stock hype because the media plays such a big role in the markets. There are a couple of basic rules here:
Rule 1: Never buy a stock from a “boiler room” stockbroker that is promoting a specific stock. We often see small unknown pharmaceutical companies that put out a press release that they have started a promising trial and the stock rockets 300% only to crash a few days or weeks later. In the past, they used phone calls, now they use emails and websites to promote “penny stocks.”
Rule 3: Never buy a penny stock. Investors should be extremely cautious about buying a stock that costs less than a dollar per share. These types of stocks fluctuate greatly and can disappear overnight.
Rule 2: Do your own research. The industry is flooded with “investment newsletters” that promise amazing stock picks. They are all not bad, but the returns typically mean nothing because investors would have entered nor closed trades at the points. In addition avoid the newsletters that hype a specific hot market like “weed stocks,” because these usually provide little value to investors.
Having patience with another problem for both new and experienced investors. I can’t you how many times I have placed a trade and it goes nowhere in the time frame I planned, only to go up a day later. If you did the research well, often you pick the winner buy need to wait a bit longer.
Too Much Risk and Leverage
Margin is great until it goes against you. Most new investors love the excitement of trading and investing. However, they must understand the risks. Experienced investors remember the tech crash and recession. I personally remember seeing a mutual fund bond fund lose over 40% of the value. As a new investor, use your leverage and margin very sparely. Even a good trade can reverse, forcing your broker-dealer to sell your position, only to bounce back a few hours later.
Trading High-Risk Markets Such As Forex, Futures & Options
I recommend investors stay away from forex, futures, and options when they start investing. The lure of super high and fast returns are great, but the risks are equally great. Not only can you lose your full account value, but you can actually be negative. If someone wants to start investing in these markets, use an online “paper” account, and slowly learn the markets. Never open a non-US brokerage account.