Learn to Invest Money: How to Avoid the Three Biggest Mistakes of Beginning Investors

Mistake Number One: Believing All that Glitters is Gold

There are plenty of so-called experts always pumping the next hottest stock on television. And sometimes they may even seem like gems because you never heard about the company and when you ask all of your friends, they never heard of the company either. And the company has a compelling story. But according to whom? To you? Or to the talking head you heard on the television or radio? It’s a well known fact that when big time investors like Warren Buffet, George Soros, and Bill Gates buy large volumes of a particular stock, the very day this information is publicly disclosed, the stock usually surges. In fact, for the people that missed the news the first day and then saw the subsequent surge, they often jump on board at the opening bell the following day, and the stock receives a second surge. You can probably make quick 2-3% gains all the time doing this. However, well known talking heads that you see on MSNBC and other stock news shows also have the same effect on stocks. They recommend a buy on a “hot” stock, thousands of investors flock like sheep to buy the stock without doing any additional research, and consequently push the stock price higher in a self-fulfilling prophecy. When they see the stock price temporarily bump up, they become even more confident in their pick, not realizing that it was the sheep herd mentality of thousands of other like-minded individuals that contributed to the temporary price rise. The only problem is that many of these stocks initially surge off of the popularity and influence of the person recommending them only to fall significantly later. The point to take home is that you should never buy a stock based on someone else’s recommendation without doing your own homework. Most people won’t even buy a television without doing prior research. So why would you ever invest thousands, or even hundreds of dollars, without doing some research as well? If you don’t know what factors to research about a company to give you more confidence in buying a certain stock, then ask your financial advisor or consultant for help. He or she should be able to shed some more light on the issue.

Mistake Number Two: Using Hindsight to Make Your Future Decisions

Never use regret over a past decision to color your future decisions. This is one of the strongest and best pieces of advice I can give you regarding investing, and regarding life as a matter of fact! There are times when a talking head on TV will be right and you’ll see one of his or her “hot” buys rise 50% in several months. This might give you what is commonly known as buyer’s regret, causing you buy the talking head’s next “hot” recommendation. Now if Murphy’s Law is in effect, as it is bound to be, you’ll end up losing 50% on this “hot” stock pick. The way to evaluate every stock opportunity is on its own merit, without judgement being clouded by past actions or indecisions. And as I mentioned above, one should always have research strategies, and buy and sell strategies mapped out before even considering anyone else’s stock recommendations. Consider your additional research as an absolute must “second opinion”.

Mistake Number Three: Not Understanding the Types of Stocks You Buy

There is a huge difference between buying a General Electric and a Hemispherx (a small biotech company). If you invest in volatile stocks with the potential to run up 50% in one year, then you must track these stocks very closely for exit points during a potential run-up or downfall. People think that protecting the downside of volatile stocks by using stop-loss orders is an adequate strategy, but I’ve also heard many stories of investors who lost all of their enormous gains on particular stocks because they never checked their portfolio while traveling in Europe for three months. Protecting your gain is just as important as protecting against a loss. If you’re not willing to take effort to protect your gains, then why invest in the first place?So in summary, always remember three points. (1) Never invest in a stock until you have gained a second opinion with your own research or the research of your financial advisor; (2) Never let past mistakes grow into a second mistake; and (3) Until you understand that different strategies must be employed with different types of stocks, refrain from starting your investment career.

© 2006 Global Market Opportunities