The excitement of getting into the stock market can be palpable for some people.
But sometimes excitement can lead to poor decision making. In the stock market, poor decisions can be costly decisions.
So, here are three mistakes I think a new investor should seek to avoid when they first start investing – and three things that could make sense.
Don’t: fixate about charts in isolation
Sometimes, a share price chart has gone up and up and up, making it look as if it will keep moving up.
Other charts show massive declines, meaning a share now costs far less than it once did.
Charts can be helpful – but never in isolation.
Just looking at what a share has done in the past, with no other context, gives no reliable basis for deciding what it may do in future.
Don’t: set unrealistic goals
Wouldn’t it be great if a share you bought doubled in a year?
Yes, it would – and it could. However, while it is possible, it is unlikely to happen.
Most of us like to think we can beat the market. In reality, as a new investor still learning hard lessons, it can be difficult even to match the performance of an index like the FTSE 100, let alone beat it.
Setting unrealistic goals can lead to unnecessary risk-taking and rash decisions.
Don’t: ignore stockbroking costs
Buying and selling shares usually costs money. Even just holding shares in an ISA or SIPP can cost money.
Those costs are real and they can mount up, especially with frequent stock market dealing. So it is important not to ignore the impact they will have on financial returns.
Do: choose the right share-dealing platform
That leads onto something I think a new (or old) investor should do: carefully choose the right share-dealing account, Stocks and Shares ISA, trading app, or SIPP for them.
Do: spread your investments
One simple but important risk management technique is not putting all your eggs in one basket.
In the stock market that is known as ‘diversification’. A smart investor makes effort to stay diversified, whether investing a little or a lot.
Do: think about the long term
Warren Buffett’s partner Charlie Munger once said that the big money in the stock market is not in the buying or selling, but the waiting.
I agree: that sort of long-term approach to investing can help build wealth.
Take Filtronic (LSE: FTC) as an example.
The company’s growth in recent years has been impressive. What if it is still only scratching the surface, though?
This year’s rumoured flotation of Filtronic client and shareholder SpaceX could help raise the company’s profile. SpaceX’s expansion plans could mean more sales in future for Filtronic thanks to its unparalleled specialist expertise.
There is a risk of concentration with one very big client (as I said above, diversification always matters!) but Filtronic has landed contracts with other customers. With SpaceX as a case study, I think Filtronic could tap into significant demand growth.
It operates in a niche but growing field that can command high profit margins. The more it sells, the more credibility it will likely gain, hopefully helping it sell even more.
That will take time, though. From a long-term perspective, I see it as a share for investors to consider.
