Oct. 19, 2017 /Lydia Wanjiru/ -- Investing in stocks is one of the best ways to build and grow wealth. Although all investments carry some degree of risk, investing in stocks can result in great gains if done appropriately. Here are 3 mistakes to avoid when investing in stocks.
1. Not having a plan
A clear plan is of paramount importance when investing in stock. You need to set clear investment goals and objectives to succeed in stock investments. Find the appropriate investing style and strategy to use. Determine how much you need to get started and how much your portfolio will cost. Doing a proper research is imperative to making an ideal investment decision. Undertake an in-depth research on what to invest in and why. Put in place the appropriate benchmarks of how you will measure the success of your portfolio. Research the past performance of a particular stock, read the analysts reports, follow the company’s news and annual reports to help you make an informed decision. Consider the risks your portfolio may be exposed to. You can invest in stocks through buying your company stocks or through a brokerage firm. If you decide to use a brokerage firm, get an established financial planner or a stockbroker. Avoid taking advice from unreliable sources and ensure you open an account with a reliable stockbroker. Evaluate the stocks prices and decide whether you want to make a market or a limited order.
2. Investing in one stock
Buying one stock is like putting all your eggs in one basket. Do not put all your money in one stock. Diversify your portfolio to reduce risk and maximize returns. Create a broad portfolio of securities with a mix of equity, bonds, mutual funds and other investments. Different asset classes have different risks, opportunities, pricing, structure, market customs, valuation models, legal structures, tax rules and more, thus you need to choose the asset allocation that you are comfortable with. Diversification also helps you to mitigate the unsystematic risk specific to a company, industry, market, economy, and country. Diversification helps you to manage business and financial risks and the assets price volatility and movements. To achieve your financial goals, diversify your portfolio of assets and include the ones that will not be affected the same way by the same market events. You need to keep re-balancing your stocks depending on your portfolio performance to achieve your financial goals.
3. Borrowing to invest
The stock market is highly volatile and investing in a stock market involves taking a risk. Since you are not sure of how your portfolio will perform, avoid taking out a loan to invest in stock markets. Invest only the surplus funds that you can afford to lose. Avoid buying stocks in a rush based on the current strong performance of a particular stock. Adopt a long-term perspective and focus on the future. This does not mean that you cannot get in and make a kill in the short-term but keep a check on your goals. Keep emotions separate and avoid letting emotions cloud your investments judgment. Investing in stocks is rewarding, however, get into it fully prepared for whatever the outcome.