It’s not an easy decision to invest in stocks. Even if you stick with safe investments, there’s always the chance of something going wrong. But with inflation always devaluing your purchasing power, you can’t afford to throw your cash in a bank account and let it set.
That’s a big reason why so many people invest in stocks. Reports show that 58% of Americans own stocks.
You must avoid common errors with stock investments if you want to get the most from your money and avoid losing it. Below are seven common mistakes to avoid with your stock investment strategy.
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1. Ignoring Safe and Easy Investments
It’s tempting to throw caution to the wind when looking at your options for stocks. You see many companies that look great and believe they will grow a lot in the future. The problem is you’re taking a ton of risks initially without solidifying your safe investments.
Stock funds, like index funds, are usually a better place to start investing. Index funds expose you to all the top companies in the stock market — and even better, they have a history of providing good stock investment profits over time.
See which stock funds are available and begin your investment there. You can expand to individual stocks in the future when it’s time to diversify your investments.
2. Timing the Market
Many people see the swings in the market and believe they’re good enough to pick the right time to invest. It makes sense, in theory, to do this — you buy a stock at a low point and can cash out for a profit when it goes high again.
The problem is that it’s hard to predict what will happen with stocks. Even experienced traders have problems doing this and don’t try to time the best time to buy.
Most people are better off taking a dollar-cost averaging strategy when investing. Instead of investing a lot of money all at once, you invest small amounts over time. This strategy will give you exposure at several price points and usually averages a significant return over time.
3. Trading on Emotion
It’s not uncommon to get emotional when your money is involved. You invest a lot of money in the market, and when things take a bad turn, it’s tempting to panic and withdraw everything to avoid losing more.
But doing this is usually a mistake. Historically, downturns are temporary. If you have no immediate need for your investment money, it’s usually wiser to hold your investments where they are until things turn around.
The only time this may not make sense is for individual stocks. A company you thought would succeed may fail, so this situation may require you to withdraw your funds. But this usually isn’t a great idea when it comes to total market funds like index funds.
4. Not Learning Investing Signals
It’s great to learn what a company does before you make a trading decision. However, it isn’t the only thing you should consider before buying a stock. There are other factors to consider that make certain companies better buys.
One common thing to look for when determining whether to buy a stock is investment ratios. These are factors that help you look at a company’s financial health.
Here are some common ratios to look at:
- Earnings per share
- P/E ratio
- Debt to equity ratio
- Return on equity ratio
- Quick ratio
5. Chasing Trends
There’s always a new shiny object in the market. A company claims to have a great product and will make a ton of money, so investors flock to them to cash in on the hype.
The problem is that it’s usually just hype with nothing to back it up. This leads to many people losing money because the hype dies down after the company doesn’t deliver.
Try to avoid following stock investing trends like this. Create a clear and safe strategy to offer the safest and highest return on your investment. You can make an occasional bet — just make it the exception rather than the rule.
6. Not Diversifying
Another big mistake people make with investing is putting all their eggs in one basket. They see something that looks promising and put everything they have into it. Even if it’s something safe like index funds, it’s still not wise to do.
It makes more sense to diversify your risk. You can do this in stocks by purchasing individual growth stocks or looking for dividend returns.
You don’t have to stick with only the stock market, either. You can start investing in assets like real estate to spread your risk even more.
7. Not Having a Goal
While putting a few dollars into investment accounts now and again is never a bad idea, it will only get you so far. Most people invest because they want to set themselves up for the future. If you determine your goals, you won’t be able to do the same.
Think about when you want to retire and how much money you want during that time. This will tell you how much cash you’ll need in total and how much to invest to reach those goals.
These numbers will vary for everyone, so consider your unique needs and set a goal to meet those needs.
Don’t Make Common Errors With Stock Investments
Investing your money is a great way to increase your net worth and ensure your purchasing power doesn’t decrease with inflation in the future. However, you need to do things right to avoid making bad investments and losing your cash.
Luckily, there are many common errors with stock investments you can learn about that will help you avoid making bad decisions. Remember the mistakes above when building a stock portfolio to navigate the stock market successfully.
Are you looking for more advice that will help you set yourself up for financial success in the future? Read more financial advice on the blog to learn more.
