5 Mistakes New Investors Should Avoid
Rookie mistakes are unavoidable in any profession, and for novice investors, the learning curve can be a painful trial-and-error process, but it doesn’t have to be. With the permission of venture capitalist and businessman David Kezerashvili, we republish his list of the five most common mistakes made by new investors.
By exploring the typical investment mistakes, first-timers can escape unnecessary headaches and start constructing a profitable portfolio.
1. Investing Without Doing Research
The market is built on hype, and the media loves glorifying charismatic CEOs and products that promise to revolutionize an industry. It's very easy to get entangled in a trendy wave, but buying shares just because the stock is momentarily hot is an amateur move.
The question every investor, no matter the experience level, needs to ask before committing funds to a company is if the praise is justified. Is there a real demand for the product, and how well is management coping with meeting that demand? Finding answers is possible by performing in-depth research on the company's performance.
The stock price is not a reliable indicator, as it can get inflated by the buzz surrounding the brand. Evaluating the market growth, revenues, profit margins, and business development strategies is the best approach to gauge the true value of investment opportunities.
2. Not Being Aware of Fees
There is a well-known saying – spend money to make money – but there is a caveat to that rule. Spend less and earn more! In investment, that means reducing the fees. Most rookie investors are oblivious to the range of fees charged, from commissions and advisory fees to purchasing fees.
Traders are buying more than just shares. They buy the right to purchase the stock on an exchange or through a broker. And once an investor joins a fund, they get automatically burdened with administrative and fund management fees.
These all pile up and can significantly cut into the profit margin. The days of symbolic fees are long gone, the market has evolved, and that's reflected in the cost of using new trading applications. Discerning all the costs is a prerequisite for a successful career.
3. Panic Selling at the First Sign of Loss
Novice investors are fearful of an investment losing value. However, the market is cyclical, in a constant state of flux, with down and up periods being a normal sight for veteran traders. However, young investors get uncomfortable with market volatility and cannot stomach a loss.
The best method to tackle the changing market tides is to formulate a plan with investment time frames and goals. Sticking with the plan in turbulent and prosperous periods is the recipe for comfort.
4. Not Diversifying a Portfolio
It's never smart to put all your eggs in one basket, and that logic applies to the stock market. The key to stable returns is diversification. Most industries are affected by a varied set of factors, and political circumstances and environmental factors can influence a company's performance.
Focusing on different industries means that at all times, potential losses will get offset by a positive balance from other productive sectors. That way, capital stays intact. A diversified portfolio is accomplished by gradually including short and long-term investments, which offer a solid balance between risky and more stable companies.
5. Overtrading Is Not a Smart Strategy
Overtrading is also known as churning, and both terms are used to describe a strategy of excessive purchasing and selling of financial instruments. This is symbolic of short-term traders, who buy and sell stock in a single day, trying to profit from price differences. However, most traders ignore the fees for such trades, which significantly reduces the small profits.
Even though overtrading is a tactic employed by position traders, some investors overtrade for different reasons. Excitement is one cause of churning stock. The hype and open positions seduce traders without performing the proper analysis, leaving them with low-value investments once the market moves in a different direction.
Fear is also a motivating force to overtrade when investors expect a share to take a deep dive on the trading charts. The important point is that when churning increases, the cost of investing rises, but not the expected returns.
Investment is a turbulent business field, contrary to the popular perception created by movies that represent young traders enjoying a fast-paced luxurious lifestyle with huge profits made with just a phone call. The reality is that first-time investors must invest time, patience, and hard work to build wealth.
Novice investors are eager to climb the ranks and frequently ignore valuable lessons. The best career shortcut is to avoid common mistakes that consume time and money. It would help if you also undermined confidence, which is an essential capital for a young trader. Potential losses loom at every turn in the exciting but volatile world of investing, where fortunes are built in a single day's trading. Finding profitable investments that will outperform probable failures is the key to a successful strategy. By following our advice and avoiding those expensive but preventable blunders, you can succeed.
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