Investing in the stock market has always been a good long term investment choice, you can invest wisely in the stock market and make more money than you could possibly make by investing in other, more conservative areas, such as real estate.
There are, however some stock market investing mistakes that even professional investors often make, and it is entirely possible to avoid them.
Common Stock Market Investing Mistakes…
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1. Investing In The Company You Work For
This is a dangerous thing to do, employees are often encouraged by their own employers to invest in company shares. Sometimes they even invest all their lifetime savings! The danger is that if the company goes bust, you will lose both your job AND your investment!
2. Investing With Only One Company – One Stock
It poses similar risks as the ones mentioned in the previous tip, rather you should diversify, and invest your money in different industries and different stocks. For example; One defence contractor, one retail chain, and one stock in the banking sector. Avoid pharmaceuticals and any companies that claim to have invented new products!
3. Committing All Your Capital At Once
This is a really dumb thing to do, markets fluctuate up and down throughout the year, what if you end up buying the very top? It’s much better to plan ahead, and spread your capital commitment over 3 purchases over one year or longer.
4. Ignoring Seasonal Trends
Did you know that markets have a statistically proven tendency to make extreme lows in March and October? Even if you do make all other 4 stock market investing mistakes mentioned here, you can still make money from this seasonal factor alone! When the market rises, 75% of stocks rise, this can include junk stocks too, and when the stock market falls, 75% of the stocks fall, this can include the best stocks.
5. Believing True Company Value Reflects True Stock Value
Not necessarily! Stocks are merely a trading vehicle and their value is determined by supply and demand, there’s stock trading value and stock intrinsic value. The only value that’s visible to us is trading value, intrinsic value maybe $0, $100, or $500 even though the stock is currently trading at $70.
These are the most common stock market investing mistakes people make, believe it or not we as humans make some unbelievably dumb mistakes, and act irrationally when it comes to stock market investing. That is because we become emotionally driven and we feel the need to imitate what others have done. But don’t take my word for it, look around you, identify stock market losers, then ask them how they invested their money and write down the details.
Tip 2 is about diversification, and also emphasizes how dumb it really is to invest in medical research, yet most people get emotional, they think by investing in medical research they contribute to the good of mankind etc. They would rather invest in medical research than weapons research, but from a realistic perspective, the medical and pharmaceutical industry is too risky to invest in. There’s a lot of uncertainty about government funding, approvals of new medications and risk of lawsuits.
Just take a look at the US and you will see the full picture, indebted hospitals are forced to close down, no one helps, and healthcare budget is tight. Even swine flue vaccines that had good sales still caused isolated lawsuit cases! On the contrary, the US government spent $500 Billion on defence last year, the defence budget of USA and many other countries is guaranteed! And they will all keep buying military equipment regardless if we live in peaceful times or not.
During the market period depicted on the above charts, there was a broad market rally. Defence stocks followed through, but healthcare ones didn’t.
The bottom line is, we all care about the good of the world, but stock market investing is different, it’s ok to donate money to good causes, like medical research, and doctors without borders. But you do have far better chances of making this money by investing in the military industry, than in the weak healthcare industry. Rid yourself of the above stock market investing mistakes and you will be on your way to higher profits over the long term.
Here’s to successful investing
Scotty Smith
Investing The Stock Market © 2008 – 2010