To start investing, you don’t need to have solid savings or financial education. However, investing in securities is always a risk, which can become as random as playing casino slot spiele. Here are the most common mistakes that beginners make and how to avoid them.
Expecting to Get Income Right Away
“I want to invest in stocks and make a quick buck,” is what novice investors think. But investing is a long-term investment, and you shouldn’t expect quick results. The value of securities can not only rise, but also fall, and then rise again. If you want a steady, passive income, choose securities according to your goals.
Making Trades by Succumbing to Emotions
Emotions are an investor’s main enemy. Falling in the price of assets can make a beginner panic when he sees his “red” investment portfolio. But don’t overreact to any drawdown: if a stock has dropped in value, it doesn’t mean that you have to run out and sell all the securities, even at a loss. It’s quite likely that the value will return to its previous values and continue to grow.
Be patient. Investing is a long-term process: it may take you several years to build a quality portfolio.
Investing in Just One Company
The next common mistake is to put all your eggs in one basket. Buying stocks of just one company is like betting in a casino: if the company’s price declines, the investor can lose everything.
To reduce risks, allocate funds between stocks and bonds and invest in several companies from different industries. For example, invest one part of your money in an IT company, another in an energy company, a third in an automotive market leader, etc.
Experts believe that an ideal investment portfolio should consist of 10-15 securities. If one of them falls in value, the others will compensate for the losses through their growth. Such distribution is called diversification, and in addition to industries, it makes sense to distribute assets across different countries and currencies. It also makes sense to hold several types of securities in a portfolio, for example stocks and bonds.
Believing Promises of Super-high Returns
In investing, it’s important to have a reasonable expectations. Of course, a return of tens of percent per annum is possible, but unlikely. Experienced experts believe that Internet ads promising hundreds of percent per annum are nonsense. Newcomers buy assets without any understanding of what they are buying, and lose money in the pursuit of superprofits.
If you have little investment experience, choose between reasonable profits and large, but risky returns.
You need to be prepared for risk and loss. Before investing, it’s advisable to assess your goals and capabilities, and then proceed from how much money you have and for how long you are willing to invest.
You need to take that level of risk that you are able to withstand in order to go further. If you’re not willing to take a big risk, choose bonds. They will not have a cosmic return, but the likelihood of loss is minimal, and future profits are easy to calculate.
Overestimating Your Strengths and Knowledge
If you think that a few books and a crash course in investing are enough to make a lot of money in the stock market, you’re wrong. If you are going to deal with investments seriously, you will always have to study and keep track of what happens with your investments, where the business of the company whose shares you bought, how the economy is developing in the world. You need to constantly improve your knowledge in order to develop long-term strategies and competently calculate risks. This will enable you to conclude transactions more consciously and, as a consequence, to receive more profits. Beginner investors should start with small purchases in order to gradually accumulate knowledge and profit.