No human is perfect when it comes to any activity; we all make mistakes one way or another.
Some of the mistakes we make while investing in stocks are very common and not exclusive to an individual.
If we do not learn from these errors, we might end up repeating the same mistakes over and over. It is, however, exciting to realize that we can avoid some of these mistakes by simply being aware of them.
Changing to a better system, be it by going to Read more about Motley Fool at Joywallet or researching on your own, is very important. Below is a list of some of the most common mistakes we make while investing in the stock market.
1. Investing in Businesses We Do Not Understand
In several instances, we are quick to buy stocks in companies simply because the company is performing well at that time. We take very little time to research and exclusively understand the company, the nature of their business, and how trends might affect their operation. It is necessary to invest in companies that we have some basic knowledge about to have an edge over other investors.
An important component of investing is to purchase stock in reliable and profitable companies that pay you to own them. These payments can come in the form of dividends and/or share repurchases. Kailash published an article comparing the ARKF Dividend and XLF Dividend shows, often exciting new companies can dilute you while proven and profitable companies can enhance your investing income. ARKF is the popular new financials ETF while XLF is the S&P Financials ETF. While the former is full of novel new companies, the latter is loaded with financial powerhouses with long track records of making money in good times and bad.
2. Being Impatient
If we spend time researching, analyzing, and planning before investing, we are prone to getting greater results.
This, however, is not the case most of the time. We are quick to make investment decisions and expect unrealistic results within a short period of time.
The operations of businesses are slower than we would wish to see or expect. Strategies may take months to years to start yielding results.
We should, therefore, not ignore the realistic aspect of timelines within which companies operate.
3. Lack of Diversity
Often, we invest in a company, and it does so well in the initial stages to the extent that we fall in love with it.
At this point, we forget that the principal intention of investing in the stocks was to make money.
We end up putting all our eggs in one basket, which is a very risky affair. It is important to avoid this by investing in a variety of companies.
This way, we spread the risk and improve our chances of creating getting good returns.
4. Expecting Too Much
Sometimes we imagine that stocks work like some gaming entity or lottery tickets.
Expecting a $500 to turn in to some fortune is a little bit too much. However, we should not competently discredit this because it happens at times, but it should not be a mindset that we should have at all.
We need to be realistic when placing our expectations on the stock performance, however boring the numbers may look.
5. Following the Crowd
In most cases, we get information about a potential investment at a time when the business is already performing well. We hear of the news of certain stock prices doubling or tripling.
What we tend to forget is that for the media to make the move of covering such an activity, the stock is already at its peak. At that point, the stock is already overvalued.
Companies may take advantage of this, and if we do not do due diligence, we may end up buying overpriced stocks that may fall in price after the hype has died off.
6. Getting Information About Stock Investment in the Wrong Places
There are several individuals in the business corridors masquerading as experts willing to give their opinions freely.
As much as these people may look educated and full of knowledge, some of them are just out to increase their sales targets or get trading commissions.
It is essential to isolate and identify information sources that have been consistent in helping other investors gain profits.
We should also remember that for every good piece of information we get, there are probably thousands of other horrible bits of information.
The mistakes listed above are the most common; however, we might not commit all of them.
The trouble is that we might fail to learn and fall back into the same trap. We should therefore use the lessons learned to avoid making similar errors in the future.