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Mistakes New Investors Frequently Make

Updated on January 30, 2017

Money in America

Very few young adults realize the importance of investing at a young age. For many the thought of being a stock owner, seems like something one should do when the reach a certain age. The truth is there is no better time to invest than when you are in your twenties. For many, your twenties are a time when money comes in and is spent almost as quickly. With very few expenses upfront, one has the ability to spend as carelessly or save wisely, but many choose to spend away. Investment in your early twenties could lead one to be financial sound by their thirties. Following these easy five steps may better protect you from the evils that exist on Wall Street.

Mistake 1: Never Fall in Love with a Stock

One of the easiest mistakes when just starting out as an investor is picking a stock and ignoring the company’s flaws. Investing can be risky and being in denial can make it all the more challenging. Just because your stock is a personal favorite of yours does not mean they are a healthy company. There are many companies that rise and fall quickly due to change in popularity. Best example is a clothing store. Name brand stores are constantly changing their merchandise to stay relevant, problem is, it is nearly impossible to predict the next style and one mistake could mean millions lost for your favorite clothing store. This also can give shoppers an advantage, one that many stock brokers could never predict. Knowing what stores have succeeded in bringing in new crowds can be one of the best way to predict earnings, but of course can be very challenging. Best bet for new investors, pick a market you understand, but don’t pick a company you love. In the end, that company may become your worst nightmare.

Mistake 2: Don’t Ignore the Elders of Wall Street

By elders, I do not mean men like Warren Buffet or Carl Icahn, though I hear they have done quite well for themselves. I am talking about the companies that have survived several periods of economic turbulence and continue to grow. Companies like General Electric, Procter and Gamble, and American Express have had many decades of prosperity and continue to modernize to new and developing fields. Being ahead of the game is essential for a company to survive overtime and for the elders of Wall Street; they know how to do it best. It doesn’t hurt that many of these companies pay quality dividends either.

Mistake 3: Do not look Past High Stock Prices

It can be easy ignoring a company that cost fifty dollars or more because your thousand dollar investment gets you less than twenty shares, but not so fast. On average, one is better investing in well-known and stable companies like those previously mentioned, than a new or irrelevant company. One major issue with investing is the plethora of companies can be overwhelming. Though a corporation may be in the same field as a Wall Street elder, it does not mean it will run as smoothly. Making a profit can take years and investing in a company that seems to have little to no future, is not the way to keep your money safe. Though you could buy a thousand shares of a dollar stock with your money, there is a reason why the company is so cheap and sooner or later you will find out. Best bet, buy safe and don’t worry about the number of shares you have.

Mistake 4: Do Not Take Your Dividend and Run

Your quarterly dividend will most likely get you a tank of gas….. if you’re lucky, but if one is wise enough to reinvest that money, that dividend will grow over the years and become shares of your company of choice. Dividend Reinvestment Programs are an easy and (usually) free for investors. One can use the money from their dividends and purchase a share or two of their company with no fees. This is a smart way of growing your portfolio, without using more of your own savings.

Mistake 5: Take a Risk…..to an Extent

Safe investing is wise investing, but may not be the most profitable investing. My own rule of thumb is to use 25% of my portfolio for riskier investments. Those riskier stocks could put me in the green as quickly as they can put you in the red, but nothing is gained if nothing is risked. Even with these risky investments, be smart. Choose stocks you have done hours upon hours of research and never jump on the bandwagon of a stock. Watching a stock rise to extraordinary new highs can leave one wishing that was them, but nearly every time, that stock will plummet back to earth sooner rather than later. Don’t get caught up with the chaos that is Wall Street. Another quick tip when deciding to take a risk, do not fret the loses. If you feel the company you purchased has potential ride out the wave. Never rely on the money you invested, better to think of that money as spent than to think you can have it whenever.

Investing is not for the weak hearted. There will be many days of disappointment, but it is best for one to have long term goals. I personally have been investing for six years and my first three were terrible. With time comes knowledge. My best advice would be, know your companies, know the risk, and realize the stock market is a form of gambling. Never get carried away with the market and never invest more than you can lose. I personally spend no more than 20% of my savings and even that is pushing it. And lastly, enjoy the game. You will learn more about the world than you ever have by investing. Understanding the stock market is something that takes years, but will open one’s eyes to a plethora of information. Enjoy both the ups and downs and learn from your mistakes early on.

Good luck future investors!

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    • David Lucian profile image
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      David Lucian 2 years ago from Connecticut

      Glad to help! Research will help exponentially when investing in any company.

    • frozenink profile image

      frozenink 2 years ago

      I'm in my twenties and I'm thinking to invest too. Your Hub really provided me with useful cautions. I really have to re-think my investment. Thanks for the advice!

    • David Lucian profile image
      Author

      David Lucian 2 years ago from Connecticut

      couldn't agree more! Investing has many risks especially when one goes in uneducated or on a whim.

    • Say Yes To Life profile image

      Yoleen Lucas 2 years ago from Big Island of Hawaii

      Very good points, here. I'd like to add a couple more:

      1) If you don't understand how a company's inner workings affect stock value, it is best to go with mutual funds. These are a collection of several stocks. Spending a minimal amount of money can buy you parts of expensive shares, as well as several cheaper ones. The profits are less, but so are the losses, since the activity is spread out over several companies. If you want to invest in individual stock, it is best to take some stockbroker courses first; otherwise, let the experts who manage mutual funds do your trading for you.

      2) If you have debts, save anyway. Your money can be working for you while you pay off your debt.

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