Nobody's a perfect investor, and we all make our share of mistakes. In the past, for example, I've unloaded stocks during a market crash out of sheer panic, only to regret that decision after the fact. Still, we can and should do our best to avoid falling victim to blunders that could negatively impact our finances. With that in mind, here are three investing mistakes you should aim to avoid.
1. Buying penny stocks
The appeal of penny stocks is clear -- because their share price is so low, it's easy to scoop them up without sinking a ton of money into the market. That affordable share price also makes it possible to invest in multiple companies instead of being limited to just one.
The problem with penny stocks, however, is that they're highly speculative. Penny stocks are often associated with newer companies that don't have the same standing and stability as well-known companies. Because penny stocks often don't trade publicly, they're not subject to the same disclosure requirements as stocks that trade on a major exchange. As such, those companies are harder to research.
If you're limited on funds to invest, consider fractional shares, which allow you to buy a portion of a share of stock if you can't swing a full share. Though not all brokerages offer this option, more are starting to.
2. Putting all of your money into one stock
While you don't necessarily need 67 different stocks in your portfolio, some degree of diversification is important. That way, if one segment of the market gets hit, you won't lose your shirt. Putting all of your money into a single stock is a dangerous gamble, even if you have really high hopes for that stock, and even if it's been around for years and has consistently performed well over time.
If you don't want to do the research involved in buying a bunch of different stocks, look at exchange-traded funds. These funds trade on public exchanges and allow you to load up on multiple stocks with a single investment.
3. Shorting stocks
When you short a stock, you bet on its share price going down. While that bet can sometimes work out for you, it can frequently backfire.
Just look at the whole GameStop (NYSE: GME) fiasco, where investors lost millions by shorting shares of the company only to have them skyrocket. Now, if you're a truly seasoned investor with a diverse portfolio, shorting stocks is something you can look at with caution. But if you're new to investing, a better bet is to purchase stocks with great value or growth potential that you can hold for years and generate wealth in your portfolio over time.
Nobody's immune to investing mistakes, and I've certainly made my share of them. But as a general rule, I try to stay away from penny stocks, maintain a diverse portfolio, and avoid the practice of shorting, even though I've been investing for years. And it could really pay for you to do the same.
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