Investing is not easy, and even those who have been investing for many years make mistakes. In this article, I point out three common mistakes that are common among beginning investors. By avoiding these mistakes you won’t necessarily be successful right away, and you will likely make several investing mistakes that will ultimately make you a stronger investor. However, by recognizing that beginning investors have a tendency to make the following mistakes, you can avoid them and hopefully become a successful investor that much quicker.
1. Buying a stock because it looks cheap
Many investors think that just because a stock looks cheap that it offers good value. There are many qualities that can give you the impression that a stock looks cheap such as a low P/E ratio, a high dividend yield, or a high analyst price target relative to the current stock price. In fact many investment websites offer stock screening software — including popular ones such as Google Finance — that will screen for these sorts of things. However, you need to realize that while the market isn’t efficient, stocks that look cheap are not always cheap. For instance a low P/E ratio can be the result of a one-time gain such as the sale of an asset. It can also be a warning sign that analysts expect that the company’s earnings will fall in the following year.
If you are planning on buying a stock that looks cheap based on one or more factors, make sure you understand why it looks cheap. Also keep in mind that there are wealthy investors out there who have more experience and better access to information than you, and if the stock really were cheap, then these investors likely would have bid the price up. So a “cheap stock” may also be a stock that you don’t fully understand or that the market doesn’t understand, and as a beginning investor you want to avoid these — be willing to pay a little extra for simplicity.