Investing in the stock market can be a very rewarding experience as many newcomers are starting to realise. The stock market crash we saw in March has led to an increase in activity among retail investors. And the rise of online investing platforms has fuelled a growth spurt in new investors around the UK and beyond. But just because it’s easier to invest right now, doesn’t mean it’s easier to make money.
Effectively navigating a stock market crash and the aftermath of it takes great skill. Knowing when to cut your losses or when to invest more is a skill that takes time to develop. Knowing what not to do is just as important as knowing what to do in the stock market. To that end, here are four things I’d avoid when investing in stocks for the first time.
Don’t invest just because you have a fear of missing out (FOMO). A great example of this is Tesla at the moment. I wrote a piece recently on the incredible rally in the share price over the past year. As a UK investor, you can buy US listed stocks, and it can be a good idea to do so. With Tesla, it’s trading at some extreme price-to-earnings ratios, along with other traditional methods of valuing a stock. As a new investor, don’t buy just because your friends are buying it. Make sure to do your homework and see if you feel comfortable investing in the stock.
This ties in with another point to avoid. Try and avoid buying into a stock that is flashing as overbought. There’s nothing more demoralising than thinking you’re going to miss the boat and buying a stock that has already had a huge rally, only for it to pull back. You may be sitting on an unrealised loss for quite some time. It’s much better to be patient and wait for a correction in the share price of an overbought stock. This will increase the potential profit for you from the investment.
Invest for the long term, with multiple stocks
Though it’s good to be patient and pick the right time to invest, don’t try to time the market perfectly. The stock market crash in March was a great example. Only with hindsight can you look back and say you’d have bought the FTSE 100 at 5,000 points. In reality, no one could call this at the time. So don’t get overly concerned with your exact entry point when buying. As long as you’re happy with the level, that’s the main thing. You miss 100% of the opportunities (and potential profits) that you don’t take.
Don’t go all in on a single investment either. Investing in stocks is meant to be a plural expression! Putting all your eggs in one basket via one stock isn’t a wise thing to do. You become overly concentrated on the fate of that one company. Instead, split up the amount into several companies. This will help to diversify your portfolio and should give you a higher chance of being profitable overall.
These are just a few tips to help you on your way. The Motley Fool has lots more ideas about which stocks could be good buys this month. Click here to find out.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.