The stock market is exciting and overwhelming. Investing in it can bring out strong emotions and make investors do crazy things. Before you invest in the stock market, check out the common mistakes most people make that you must avoid if you want to be successful.
Don’t invest with your emotions. Instead, invest because you’re in it for the long haul – 10 years is ideal.
If you invest with your emotions, you make rash decisions. You may buy stocks you shouldn’t buy or sell stocks because the price fell. When you invest in a company, you must ride out the storm. There will be good and bad days, but overall the stock market sees a 10% return over 10 years. If you invest emotionally you could sell yourself short.
Investing in one company or even one industry is too risky. What happens when that company or industry has trouble? With all your eggs in one basket, you’re left with nothing. If you diversify, you invest in a variety of companies and industries.
If one company or industry does poorly, hopefully, the other doesn’t. The loss in one area and gain in another offset one another making it less likely that you lose everything.
Don’t invest in a company because you like it. There’s no strategy behind this. How do you know how the company will do? How do you know the company is worth investing in? Don’t invest in a company because you like their products or what they stand for – invest in them because you’ve studied their fundamentals and know they are a good risk.
Too many investors invest in a company because everyone else is investing in it (this is called "herd behavior" in finance) . They follow the crowd even though they know nothing about the company.
If it sounds too good to be true, it probably is. If you didn’t do your own research, don’t invest in it. No matter how good someone else says the company is – do your own due diligence or don’t invest. When you do your own research, you’ll know what type of risk to expect, how a company performs, and how much you should invest in it.
Only invest money you know you can afford to lose. While no one wants to lose money, you must have realistic expectations. You must know that if you lose X amount of dollars that you can still pay your bills and meet your financial obligations.
If you make one of these mistakes investing in the stock market, pick up the pieces, and move on. No one is perfect, but knowing what to look for and how to proceed is important. The most important things to focus on are diversification, only investing what you can afford to risk, and doing your research rather than following the crowd.