Stock market investing can be a lucrative way for you to live the life you want. And of course, many people believe that their investments will become the winning lottery ticket they’ve been hoping for. But with such high hopes, it’s no wonder that so many newbies make common mistakes when it comes to their investment decisions.
Ideally, you’ll partake in an online options trading course, listen to podcasts, read books, and speak to others who have been in your position before. Understanding as much as you can about the way stock market investments work is crucial to a winning portfolio.
For example, as a beginner, you may not realize that you have to pay taxes on earnings from stock market efforts, and if you aren’t careful you’ll need a tax attorney to help navigate the murky waters of tax compliance. But there are plenty of other things you need to keep in mind, too. If you’re a beginner jumping into the stock market, here are five mistakes you need to avoid:
Letting TV Dictate Stock Choices
By now, you know there are plenty of shows and podcasts dedicated to helping others navigate the stock market. Popular shows like SquawkBox can easily influence your decisions early on. If they mention good stocks, you might go ahead and veer in that direction. But the truth is, no matter where you’re gathering your advice from, you need to do independent research.
Think of stock research like shopping for a car. Sure, you want to know all the technical details about that vehicle, like what type of engine it has and how much mileage it has accrued. But you also want to test drive and see how it feels before you make any final decisions. You wouldn’t purchase a car without looking at all of your options, and you certainly wouldn’t purchase a car because someone on TV said it was a good idea. Research the company’s financial situation, conduct qualitative research, and put that research into context.
Not Starting With Index Funds
Index funds are a great way for newbies to dip their toes in the stock market world. Index funds follow a broad market: if that market goes up, so does the index fund. They are mutual funds that track the investment performance of a market. This helps you avoid having to choose individual stocks. Typically, these index funds have high returns and low costs, and the gains far outweigh the risks.
For example, the Dow Jones Industrial Average is comprised of a list of 30 blue chip stocks (stocks that are known for their solid financial history and high value). These stocks are also important to the United States economy. Another good reason you should invest in index funds is because it instantly diversifies your portfolio, which helps you avoid another common mistake that newbies make.
Not Diversifying Your Portfolio
Diversification helps you avoid putting all your eggs in one basket. A diverse portfolio allows you to spread your potential losses across several different options; the same concept applies for gains. Aside from investing in an index fund, buying a diversified ETF portfolio also helps aid your diversification efforts.
Withdrawing Investment Gains Too Soon
It’s exciting when you start to see money materialize from your smart stock decisions. Any time you pick a good stock, you want to analyze those long-term projections over the course of the next several years. After all, this is an investment; pulling your gains too quickly turns into trading, which is a whole different ball game than investing in the stock market. Many pull their gains if they believe the stock market is going down and there is no foreseeable bounceback on the horizon. However, market dips tend to smooth out over time, and the investors that tend to win are those who weather the storms and ignore the noise.
Overanalyzing the Market
Naturally, when you first invest in the stock market, you’ll want to protect that investment. With this in mind, it’s not uncommon for newbies to pay too much attention to the rise and falls of the stock market on a daily basis. Watching the markets often can easily make you question every decision you’ve made, and question them often.
The fact is, the stock market will always go up and down, and small increments aren’t enough to make you question the strength of your decisions. The stock market moves like the ebb and flow of the ocean; it’s inevitable. Watching the market each day allows you to become accustomed to those fluid movements, however, it can hurt you in the long run if you depend too much on daily happenings.