Securities For Beginners

Wednesday, December 14, 2005

Common mistakes

1. Bcoming greedy
Many investors become greedy when their shares rise. During the internet bubble many stocks rose 150 % within a week and the investors were happy – and sure that this is going to last forever. When the markets collapsed, profits of 300 % turned into losses of 95 % before most of the investors even realised what was happening. When your shares develop well, make sure it is because of the companies success in the market and not because of some hype. In addition, think about selling a good amount of your shares to take the profit and look for a new investment opportunity.

2. Relying on your broker’s advice only
There is nothing more important than a good and unbiased research before buying a companies shares. People often buy stocks because their brokers recommended them – but when your broker is such a genius, why is he still working for the money? Don’t reject your brokers advice in generel, but do your own research instead of following blindly.

3. Not cutting the losses
People are often afraid of accepting the main fact in investing: There is no perfect investor. Everybody makes a wrong decision sometimes, but the good investors sell their shares when they realise they made a mistake. Instead many people keep their shares although they already lost 10 % and more because they hope it will rise again. Don’t do this! Accept your mistake, take the loss and learn from it.

4. Losing patience
When you have done your research, found that company X is a strong buy, set a price target and bought the share you expect the share price to rise – immediately. Unfortunately the stock market hasn’t been waiting just for you to invest, a good investment takes time to develop. So don’t lose patience and sell too early just because the share gained 3 % instead of the expected 10 %.

5. Investing money you need for other purposes
Don’t ever invest money you need in the future for paying your children’s college fees or maybe to repair your house’s roof. If the money you plan to invest is not “free money”, meaning money you saved but won’t necessarily need in the next 5 years, don’t invest it. Otherwise you will get nervous when your investments behave in a way you haven’t expected making you sell it before it got the chance to develop. This also applies to lent money: Never ever borrow money for investing! If things go wrong, it’s not just the invested money that’s gone – you’ll have to pay the interest rates without getting compensated by your investments.


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