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Stock Market Investing- 4 Mistakes I’ve Made So You Don’t Have To

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.

 
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Posted by on February 17, 2012 in Uncategorized

 

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Buy High, Sell Low… Wait That’s Not Right

I’m going to use my blog as a tool to help people understand personal finance. After studying finance in college I realized that it’s an out-dated science. There are some old concepts that work, but there are even more concepts that need to be revamped. This blog will be used in a manner that will help educate readers on the basics of personal finance, while looking at investing techniques to accomplish financial success.

Everyone has heard the term buy low and sell high. It’s interesting to me how everyone knows this general concept, but events like the real estate bubble still occur. This morning I was reading an article called Stock Market Psychology- Why We Buy High & Sell Low by Shibashake. In this article I think they nailed the psychology behind bad investing. I’m going to go over one aspect of the article now; however, I would recommend reading the whole thing.

When you’re young it’s common to make a mistake and then blame it on friend. Your parents might have said “If your friend jumped off a bridge does that mean you should do it too?” According to the idea of social proof, you probably would. Social proof is the idea that if people around you are doing something, you’re likely to rush in and do it too. This relates to investing because sudden high volumes of demand on a stock will inflate the price. This means that you’re more likely to buy this stock even if it’s overvalued. The article makes this seem like a bad thing, but I have a different take on the matter. When I was a teenager Google announced its IPO ($100 a share). I really wanted to buy some, but my dad talked me out of it. As time went on, Google’s share price kept climbing and climbing. I knew I made a mistake not following my gut. My father wanted to save me from social proof, but if you’re able to get on the bandwagon early it isn’t always a bad idea. In fact, it can be a great way to gain big profits. The ideas to keep in mind are that it’s important to protect yourself and understand what you’re doing. If you’re going to take a calculated risk, make sure you set up a sell-stop order. This will prevent you from losing too much money.  You set the sell-stop price, and if the price falls below the set amount it will automatically be sold.

If you decided that you would rather try to avoid social proofing all together (which is what I would recommend to beginners), the article has one ingenious way to get around it: THINK BEFORE YOU ACT! It seems so simple, but we all know how easy it is to rush into a decision. The article suggests coming up with an investment strategy to prevent this. I agree that this is the easiest way to gauge if your investment is well thought out, but I also know that many people won’t want to take the time to do this. My suggestion to those people is to set up a time frame that you give yourself to think about the investment. Unless you’re a big player, a solid investment won’t require a split second decision. Once the time frame is up, go ahead and make your move.

 
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Posted by on February 12, 2012 in Uncategorized

 

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