5 Wrong Ways to Invest in Stocks

The stock market is a mystery to many and treacherous waters to even more. At one point, everyone had their own misconceptions on the mechanics of investing world.

There is no doubt that investing is an emotional roller-coaster ride. The passengers who can tolerate the ups and downs would be less likely to make a bad investment decision.

When I first started, I made many of these same mistakes with real money. The rookie investor in me didn’t realize that I made these exact mistakes when I was fooling around with virtual stock portfolios. I’ve become much wiser since.

I hope the many rookie investors out there don’t repeat them:

• Investing in the popular brands. So, you saw an appealing Abercrombie ad on the side of a building and you see all the teens wearing their clothes. That does’t make Abercrombie a good investment. Frequent exposure to a brand only reveals a successful marketing campaign but says very little about the company’s performance.
• Buying high dividends. Compared to a high-yield savings account, a company’s dividends might look like a golden. Dividends are typically cash that a company doesn’t need and is returning to shareholders. This could signal lagging growth that deserves some research before a stock with a dividend yield of 9+% goes bankrupt the next year. Recently, BP was speculated to be on this path.
• Buying in on dips. If a stock (or the stock market) takes a dive, many investors are learning to buy instead of sell. Sure, this is a way of getting discount stocks through dollar-cost averaging – but buy only after you’ve done the necessary research so that you aren’t buying poor value.
• Putting money on that stock tip. Stock advice always seems convincing to an amateur investor. It’s normally those who start investing with very little funds and end up losing most of it within the first few trades. When it comes to investing, tread along with this golden rule in mind – there are no guarantees in the stock market.
• Playing according to the news and media. Whether you are a fan of CNBC or Bloomberg, it is common to have the news and media sway your investment decisions. Any of the so-called experts and analysts are voicing their opinions and beliefs. What they say have no effect on the company in question. Also, any news, whether positive or negative, shouldn’t be indicative of the future. Most news on TV represents short-term influences on investment analysis. Research the news much like how you’d perform a full body checkup on a company.

There is No Right Way
Sadly, no matter how often we preach the sound methods of investing, everyone (including the best investors) will make mistakes. There are infinite ways to do something wrong and few way to do it correctly. Don’t be surprised to hear preposterous methods such as selecting stocks with ticker symbol that include only vowels or jotting down the letters in a child’s spoon of alphabet soup.

There is a chance that these five wrong ways end up making you money. But, when you stop to think about it, how would it be any different from gambling?

(Photo credit: Jesse Gardner)

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