It can be tempting to throw in money on a good tip, especially if you actually see the stock prices rising on the NYSE, NASDAQ, the OTCBB or the Pink Sheets. Experienced investors make money when there is a bull market, but the uninitiated could end up with unwanted stocks by the time the bull run ends.
To avoid the pitfalls of stocks investment, it is important that you understand how to dodge mistakes and make your portfolio reap good returns.
Plan Ahead A tax refund or a hefty commission came in unexpectedly, and all of a sudden you've got this surplus of money. Instinctively, you'd look for lucrative investments to make your money grow. Stocks investment can be profitable if you know what you are doing. Decide how much money you wish to spend on your stocks investment and identify your risk tolerance.
Determine Your Time Frame Time horizon refers to the length of time you're willing to commit before liquidating your stocks investment. Typically, stock investments should be more than 5 years to get good returns. If you cannot wait that long, your money may be better off invested in mutual funds like balanced and debt funds.
Know the Stock Market Which markets interest you the most? Technology? Healthcare? Real Estate? Telecommunications? Consumer goods? If you can't decide, you might want to dabble into mutual funds, where an investment company will put your money into stocks, bonds, and other assets. Make it a habit to monitor the market trends. With global stocks plunging to a five-year low last October 10, 2008, economies are struggling to fight the worst financial crisis in 80 years. European and Asian markets are down, and Wall Street is tumbling, so know when to buy and when to sell your stocks.
Know Your Stocks Before making any purchase, do a fundamental analysis on each stock. Use online stock screeners to analyze potential picks. Using in-depth research, evaluate stock value by looking at economic factors such as interest rates and economic conditions, and analyze important company data including revenues, earnings, future growth, return on equity, and profit margins. Hot stocks may not be beneficial for long term plans. Monitor price changes regularly and keep yourself updated with company and industry news.
Trim Your Portfolio More is not always better. Beginner investors often fall into the trap of collecting too many stocks from too many industries. Managing a large and diverse portfolio can be problematic for first-timers in the stocks investment field. The ideal portfolio should have at least 5 to 8 stocks from at least three different sectors. Combine large cap stocks with penny stocks to keep your portfolio balanced.
Stick to Your Strategy Another stocks investment pitfall that non-experts should be wary of is impulsively adding hot stocks to their portfolios. You've poured in hours and hours of research on a stock, and finally you've decided this is the stock that offers the best returns; do not do a U-turn and change your strategy just because you heard some tip from your broker or friend. Patience and timing are keys to a successful stocks investment.