3 Dangerous Moves for First Time Investors

Paul Miller |

First-time investors are bound to make mistakes when it comes to judging and making decisions regarding the stock market. Without experience, it is all too easy to be swept up in the excitement of investing and make decisions based upon emotion rather than sound reasoning. Before you consider making your first major investments, read through this list of three dangerous moves first-time investors often make.

Jumping in Head First

One of the most common tips of investing is to buy low and sell high, but it is imperative to understand the true meaning behind low and high. Everything in the market is relative in nature, which means any given stock is only as truly high as the seller believes its value to be, and low is only that which is low enough to entice a buyer during the transaction. As a result, it is important to study the market and history of a stock before jumping in.

At a bare minimum, you should know the basic metrics of any stock or fund, such as the book value, divided yield, and price-earnings ratio. How these figures are calculated, where major weaknesses lie, and how that stock has performed over time (as well as the industry) is important. Do not overlook the potential value of virtual money in a stock simulator before making major purchasing decisions.

Playing Penny Stocks and Fads

Depending on who you are, penny stocks can be a dream or a nightmare. The Motley Fool offers a rundown on the dangers of penny stocks, including the lack of financial transparency, governance, and a market that can be illiquid.

Penny stocks are popular with most because you can get more shares with less money, and a smaller rise can give you greater profits comparatively speaking. However, the potential profitability should be measured against the volatile nature of the market for penny stocks.

Most importantly, there is a reason that penny stocks are named as such. Many of these companies are poor in quality and do not generally turn a profit. A loss of just $.50 on a penny stock could mean a 100% loss on your investment. These stocks are exceptionally vulnerable to manipulation and illiquidity. Even worse, finding solid information to base your investing decisions on is difficult.

The best approach to investing is to focus on stocks in terms of percentages and not the total dollar amount invested. It is better to own a quality stock over a longer period of time than trying to make a quick buck on a low-quality investment.

Going All in with One Investment

It is never advisable to dump 100% of your financial capital into a specific commodity future, forex, or bond. The Wall Street Journal points out some of these first-time investing mistakes, including the folly of investing everything, including your emergency cash, into stocks right away. Additionally, investing the entirety of your capital in one type of fund opens your portfolio up to imbalance and leaves it reliant on one type of stock or industry.

Remember that even the best companies go through ups and downs that result in dramatic declines in value. Look no further than Apple's stock as a perfect example. In August 2015, Apple stock was above $130/share, and has since plummeted below $100 to settle in the mid-90s.

A lack of diversification and moving too quickly on hot tips can damage your long-term ability to enjoy quality returns. A lack of diversification opens you up to greater risk, and quick decisions based on emotion or hot tips puts you at a disadvantage given professional firms have that same knowledge before you with greater ability to analyze that tip.

If you want to experience true investing success, take your time and act wisely as a first-time investor. Do not be afraid to consult a financial advisor for assistance in making smart choices when you begin investing.

For more information, please contact Paul Miller at Indian River Financial Group.