5 Stock Investing Mistakes to Avoid
Here are five big stock investing mistakes that individual investors should try to steer clear of.
1. Forgetting about Taxes
When you buy and sell stocks, you have to pay taxes on the money you earn (unless you’re trading within a tax-deferred or tax-advantaged account, like a 401(k) plan or IRA). And those taxes can make a big difference in your overall return. Generally, if you make money on your investments, you’ll have to pay capital gains taxes. If the gains are considered short term (the stock is held for less than 12 months), the taxes will be higher than if your securities were held long term. You’ll also need to pay attention to other tax quirks, like wash-sale rules.
2. Putting All Your Eggs in One Basket
If there’s one investing mistake to avoid, this one is it. Putting all your eggs in one basket — in other words, going all in on a single investment — can be a recipe for disaster if that investment declines substantially. When it comes to spreading your money between baskets, that means not just buying stock in multiple companies, but buying stock in different types of companies. You may benefit from a portfolio that has a variety of stocks, some big companies, some small companies, and some international companies, all in a variety of industries. In addition to diversifying within one asset class (stocks), you also want to diversify among asset classes. In other words, invest a portion of your portfolio in cash or bonds, unless you have a high tolerance for risk and a long time horizon.
3. Listening to Too Much Financial News
Being educated about financial markets and staying up to date on the latest trends in business is one thing. But don’t constantly tune in to the news and then make big changes to your portfolio based on what you hear. The idea that you can get a hot tip or special investing insight from the mainstream media is a fantasy. That’s not to say these programs aren’t informative. But they’re just that: information. Unless you’re really seeking short-term investing gains, you should be focused on your long-term investing strategy. That means making investment decisions based on the big picture, not this quarter’s earnings report.
4. Buying Penny Stocks
Penny stocks are ultra cheap shares in small companies and aren’t usually traded on the big exchanges, like the New York Stock Exchange or NASDAQ. The market for penny stocks is fairly opaque. The Securities and Exchange Commission (SEC) notes they trade infrequently and can be difficult to sell, characterizing them as speculative investments. Buying penny stocks can be fun for a lark, but they’re a risky investment. For that reason, it’s probably not smart to make penny stocks a significant part of your traditional portfolio.
5. Buying on Margin
Buying on margin involves borrowing money to purchase a stock. It’s a way to buy more stock than you would normally be able to. Your brokerage firm and the Federal Reserve Board have rules about how much you borrow initially and the minimum amount of equity you must maintain in the account. There are also rules about what types of stocks you can buy on margin (penny stocks are often forbidden, for example). Savvy investors who are comfortable with risk may buy on margin because if the investment increases in value, it can mean big gains. But for most people, it’s a pretty risky move. If the value of your stock falls below a certain point (the maintenance margin), your broker may issue a margin call. That means you’ll have to come up with a certain amount of cash or risk losing your investment, sometimes with little or no warning.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.