I started getting interested in stocks at the tender age of 15. Like most investment beginners, I had dreams of striking it rich. I mean how hard could it be? I came up with all sorts of schemes that, at the time, seemed like great ideas. There was no way they could go wrong. I was 15 after all. I knew everything. It was tough when I realized that, most the time, the stock market isn’t a get rich quick kind of place, and I’m hoping my folly can save you money.
1) Don’t Buy A Stock Just Because It Splits:
A stock split usually occurs when a company thinks their stock price “looks” too expensive (which would prevent investors from buying it). There are all different kinds of stock splits, but the easiest to understand is a 1 to 2 split. When I was 17, EBay announced they were going to do a 1 to 2 stock split. Their stock price went from (around) $80 a share to $40 a share. No value was gained or lost because the number of EBay shares available doubled ($80*1 share= $80 and $40*2 share= $80). To me, as a new investor, I thought this was the deal of the century. I mean the stock price HAD to go back up to $80.00 a share. Unfortunately, I didn’t understand that rarely happens and lost money.
2) Not all IPOs (Initial Public Offerings) Are A Good Buy:
An IPO is stock that will be available to buy for the first time on the stock market. When I first started investing I was obsessed with them. I thought that it was a good opportunity to make money quick. The reality is IPOs are very uncertain. They are prone to sharp spikes and drops as the market tries to figure out their true value. It is possible to make money with IPOs, like my Google examples from my first blog post, but more often than not it’s best to stay away from them when you’re first starting out. My advice is if you really want to buy an IPO wait a few months for it to find its feet. If you really believe in the company a few months of waiting won’t kill you.
3) Don’t Become a Day Trader With A Small Stack Of Cash:
A day trader is someone who is willing to hold stocks for a very short amount of time. They constantly buy and sell all day long just to try and make a little profit. The idea of day trading seemed exciting to me. Trading stocks all day long would be exciting, and I wouldn’t have to be patient and wait for the stock price to go up. It would be easy money, and I wanted easy money. The problem with day trading is it’s for people that have a lot of money. They don’t have to worry about the trading fees because it’s nothing compared to the investment they are involved in. I found myself losing money even when a stock’s value would go up because of the trading fees. It’s important to understand that if you’re getting involved in the stock market with a small amount of money ($1,000 or less per company), the fees can eat you alive.
4) Penny Stocks Suck:
The fantasy of buying a stock for $0.01 a share and selling it for $10 a share is very appealing to investors. Who wouldn’t want to get rich over night? The thing to keep in mind is that there is a reason that the stock is so cheap. The amount of risk you take by buying a penny stock (which the SEC defines as a stock trading under $5 a share) normally outweighs the reward. A friend of my parents talked them into buying a cell phone company’s penny stock. He sold them on the idea of a green cell phone. How could that idea not take off? In just a few months they were going to be like Richie Rich! That was two years ago. They bought the stock for $0.05 a share and today it’s worth $0.01 a share. I did some digging and realized people have been talking this particular stock up for years but it has never moved very far. They failed to realize that the stock market is just like everything else, and if something seems too good to be true it normally is.
February 22, 2012 at 8:04 PM
Chris, great call on stock splits. I think investors have a tendency to think that all shares are created equal – a company with a $200 stock is worth twice as much as a company with a $100 stock. This isn’t the case, but it’s easy to start thinking that way.
I’ve even done it a few times. I might be looking at two companies, one that has $50 shares and one with $15 shares and think that the $50 stock is overpriced. In all reality, it really doesn’t matter the per-share price, but how much the whole company is worth. Alas, no matter how much I say that, I still get more excited about a lower-priced stock than a higher priced one. Silly, but oh so true.
Looking forward to reading more from you!
February 23, 2012 at 8:16 PM
I don’t think sticking with lower-priced stocks is a bad idea. Technically any stock can double in price at any second, but it does seem to happen to a cheaper stocks more often. That mindset is holding on to the dream of finding a breakout stock before it breaks out. When I was younger I would look up stocks for fun (but had no money to invest). I found the company Hansen and thought they looked solid. I think their stock was around $7 a share. When I checked back with them a few months later it jumped to over $80 a share. I was kicking myself for not trying to buy some. I came to find out Hansen made Monster energy drinks! It would have been dumb-luck since I didn’t know all their products, but I’ll take it!
P.S. Thanks for my first comment