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Stock Market Investing Rookie Mistakes               


In a previous publication, I talked about the common mistakes new real estate investors make that impact their return on investment.  So, now is a good time for me to discuss the common mistakes that new stock investors make.  Again, just like with my Real Estate Investing Rookie Mistakes article, some of these stock investing mistakes I have actually made as well. 

Emotional Trading

The mistake that most investors make, be it rookie investors or seasoned investors, is that they tend to make trades that are emotionally-driven.  When the stock markets, or a particular stock, experiences significant gains over a short period of time, emotional buyers will invest in the market, or the stock in question, because they are either experiencing euphoric emotions or there is a fear of missing out on potential profits.  Similarly, when the stock market as a whole, or a particular stock that a person is invested in, experiences significant losses - or there is an anticipation of significant losses - emotional sellers will divest in an investment security (stocks, bonds, mutual funds, ETFs, etc.) due to a fear or anxiety about losing money.  Emotional investing usually leads to losses in the long-term.  There have been numerous occasions where I either purchased a security or dumped a security due to market fluctuations that triggered an emotion in me to buy or sell a stock.  It is perfectly fine to invest or divest in a stock during market fluctuations or any other scenarios, but your actions should be driven by rational analysis and not fear, anxiety, euphoria, or any other human emotion.

Penny Stock Investing

Traditionally, penny stocks were considered those securities that cost less than $1 per share.  Now, some investors include stocks trading for less than $5 per share as a penny stock.  Before I begin, let me start off by saying that penny stocks as an asset class are not necessarily a bad thing.  You can find some gems within the penny stock class.  But, I think that rookie investors get tripped up with penny stocks - or at least I did - because sometimes rookie investors tend to be young people with limited funds and exploring the stock market for the first time and the price per share (PPS) of some securities can be a little overwhelming.  Moreover, new investors - and, again, this included me at one time - tend to think that you need to own stocks in bulk as opposed to buying 10 shares or less of an expensive stock.  But, in my personal opinion, those penny stocks are penny stocks for a reason.  Penny stocks are either securities that were once highly touted by investors and, for whatever reason, the company has hit some hard times and may be possibly on their way under (example: J P Penny and Sears), or they represent companies that are fledgling and may be some ways away from telling where their market capitalization peak is.  It could even be that they have hit their market capitalization peak and will be nothing more than a penny stock.

In any event, most investors will gravitate towards penny stocks because they are cheap and they can say they own 1,000 or 10,000 shares of some company as opposed to saying they own only 5 shares of the right company.  I had to learn this lesson the hard way.  There were a few times where I bought a couple hundred shares of a penny stock at $3 per share and made about $500 when the stock climbed $1 or $2 per share.  However, those times were few and far between.  Then, I learned how owning a few shares of the right stocks could make me twice as much as I could make with penny stocks.  Penny stocks typically do not see the gains that more expensive stocks see because stock price is a reflection of company performance.  When a company has a strong balance sheet, a great product, strong sales, and a noticeable market share in their respective market, the stock price will reflect that.  When you see a successful company go public - an initial public offering, or IPO - their stock does not debut on the stock market as a penny stock.  The stock enters above the $5 penny stock threshold - usually in the $14 to $24 range because the company is strong; thus, the market capitalization is going to reflect that.  Penny stocks are penny stocks because of performance, and investing in these stocks for rookie investors is not a move that I would recommend.  I would suggest picking up a few shares of a great stock as opposed to picking up a ton of shares of a penny stock.

Market Timing

As I have talked about with emotional investing, trying to time the market is an equally pervasive mistake that a lot of rookie investors make.  Market timing occurs when investors try to predict when the market is going to fall or rise; consequently, they base their trades around timing anticipated dips and rises in the market.  Again, during the first few years of investing in the market, I was habitually guilty of trying to time the market.  I also failed about 90+ percent of the time when I tried to time the market, which resulted in me losing money as opposed to making money.

The reason why market timing is not a great strategy is because the market is very hard to predict.  For example, around the latter months of 2019, I kept hearing reports from my news sources that the United States and China were going to have a trade war and that the stock markets may be impacted.  Based on this information, I decided to not only sell personal stocks that I owned, but to also park some of my retirement investments in less volatile securities - bonds.  Then, over the weekend when the market is not open in the United States, the president of the United States sent out a message via social media that a trade deal with China would be worked out very soon.  Then, when the markets opened on Monday, all of the stocks had risen and I had to buy back into the market at a higher price.  That is the problem with market timing, you never know when circumstances and information that you do not control or are privileged to will surface.  There are too many variables within the market that you cannot control.  The best thing you can do is to follow your investment strategy and remain resolute, unless new data comes your way and you can analyze the data and determine its impact on your investment approach.

Uneducated Investing

Ignorance is the enemy of progress.  You cannot move forward and be prosperous if you do not have knowledge to rationally identify and manage your investments, or the knowledge to learn from the many investing mistakes that you will make.  Again, when I first started investing, I was picking stocks blindly without doing even the most basic research that one could do.  In my early 20s, when I first got into the workforce and opened an online brokerage account, my first investments were The Football Network (TFNK) and Digital Mafia Entertainment (DME), two fledgling penny stock (see, there’s the penny stock mistake, again) companies from whom I received a tip about from another 20-something year-old novice investor and co-worker.  The Football Network actually sounded promising.  It was going to be a network that showed nothing but football 24/7/365.  However, I am highly certain that it was not associated with the National Football League, and was also, probably, slightly ahead of its time to be lucrative.  Both investments failed almost instantaneously.

As an investor, you have to be somewhat educated on the securities that you invest in.  You do not have to know every minute detail of your prospective investments, but you should know enough about the asset to determine whether it is something worth investing in.  Analyze the past performance of the company’s stock, who are the comparable competitors within the market, what market the company operates in, and what countries generate the primary revenue for the company.  Then, use data and several analyst recommendations to determine the valuation of the company compared to the stock price, the financial health of the company, and the outlook for the company or its business sector.  And, best of all, receive coaching from a licensed specialist whenever you can afford to do so.  By doing just these basic things, you increase your knowledge of a potential investment; thus, increasing the likelihood that you will make money based off of your investment strategy.

Taking Profits Too Early

The more money you can afford to leave into the stock market, the more profits you have an opportunity to potentially earn.  If you realize significant gains in an investment asset and sell that asset, I would recommend that you take the profits and reinvest it into another asset as opposed to taking the profit that you earned and pocketing it.  I would recommend this at least until you get to the point where you are realizing significant (however you define, or quantify, “significant”) gains.  Treat your investment strategy like a business.  If you were a business owner, the wise thing with your profits would be to reinvest back into the business so that those reinvestments can help you generate more sales.  The same is true with investing in stocks.  If you invest $100 and make a 10% profit off of your investment for a total of $110, take that money and continue to reinvest it.  Eventually, your gains will build up to the point where you can start claiming some of those gains and buying something to reward yourself for your smart investments.  I have been investing for years and I continue to reinvest 100% of my earnings.  I do this because my goal is to get to a point where I can actually live off the capital gains that I generate from my investments.  When I first started investing, I was realizing three-digit gains in my investments.  Now, I am realizing far more than that.  However, I still leave my money invested in my brokerage account so that I can eventually realize gains that I can live off of.

Jumping on the Bandwagon

This rookie mistake is usually caused by a combination of uneducated investing and emotional trading.  Some people can get caught up in the hype of a stock and jump into the stock thinking that the profit train is going to continue to run while they are on it.  However, sometimes investors who jump into a stock because it has a lot of buzz around it due to market performance, or because it is an en-vogue company, may have already missed out on the gains.  Sometimes, by the time a stock is generating considerable buzz in the media due to its performance, it probably is already overpriced and you may have missed out on the buying opportunity.  The best thing you can do is add this stock to your watchlist and track it while you do your due diligence on the company.  Your next steps are to educate yourself on whether the company operates in a sector that you understand, and you are able to gather and decipher the data that you have and can make determinations about the investability of the asset.  Once this is done,  then you can devise an appropriate price to purchase the stock.

Not Cutting Losses

Rookie investors tend to stay in a failing stock too long rather than admitting the investment is no longer advantageous to keeping even though your objectives have not been realized.  Again, the stock market is an educated gambling space, and there will be times when your investment does work out the way you thought it would.  Instead of sticking to your convictions with the security, sometimes you have to sell the asset so that you can use the funds from that sale to invest in a security that has stronger potential.  Even the greatest investors make bad investments, but after rationally analyzing their position in the asset, they know when to get out, write off the losses, and move on to another investment vehicle.

Summary

Investing in the stock market can be advantageous if you educate yourself on the companies, funds, or sectors that you plan on investing in.  And, once you do acquire the securities that you have researched, you have to make rational, and not emotional, decisions.  Practice discipline, restraint, and be a student of the market.  Do not try to absorb everything about the stock market all at once.  Start off with sectors or businesses that you know about and steadily increase your knowledge over time; then you can branch out and invest in newer companies or funds.  Know when to buy into an investment, and when to cut ties with one.  And, most of all, learn something from each transaction that you conduct.  If you follow these tips, you will increase the likelihood that you will have a positive trading experience.




 
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