First Time Investors Should Avoid These 6 Dangerous Moves

Published: March 8, 2017, 7:51 p.m.

b"Remember the first time you heard about the stock market? I\\u2019m sure it got the adrenaline up for many of you: excited about picking stocks, with dreams of doubling, tripling and 10x-ing your money, the early days when you hadn\\u2019t tasted your first loss of capital and were completely unaware of the dangerous pitfalls of inexperienced, untrained, and over-confident investing. It\\u2019s almost like a rite of passage, where the market quickly hazes newbies and shows them that it\\u2019s the one that\\u2019s all powerful.
So, for those of you who are new to investing, let me give you a few tips on how you can keep from getting burned by the market.

* Jumping in Head First

The basics of investing sound really simple in theory\\u2014buy low and sell high, that\\u2019s it! How hard can that be, right??\\xa0 Well, you\\u2019ll be surprised. To make money with this simple strategy, you have to know what \\u201clow\\u201d and \\u201chigh\\u201d really mean.
Remember, in the stock market, when you buy, someone else sells; and when you sell, someone else buys. So, what you may think \\u201chigh\\u201d as a seller of shares could be considered \\u201clow\\u201d (enough) by the buyer in any transaction. Are you really smarter than your anonymous counterparty?
See what I mean, how different conclusions can be drawn from the same information? Because of this hard-to-pin-down relative nature of the market, it is important to study up a bit before jumping in. It\\u2019s really never as simple as \\u201cbuy low and sell high\\u201d. I always say that investing is simple, but it\\u2019s not easy.
Before you start investing on your own, I do believe you should read up on basic accounting so you understand terms such as revenue, revenue growth, operating expenses, operating profit and earnings per share that feature in a company\\u2019s income statement. It\\u2019s also important to understand terms such as cash, total assets, current assets, goodwill, total liabilities, current liabilities, and owner\\u2019s equity (also called book value), which are features on a company\\u2019s balance sheet, and terms such as working capital and cash flow, so you\\u2019re in a slightly better position to truly assess a company\\u2019s financial position before you jump on someone\\u2019s recommendation to buy a \\u201chot\\u201d stock.
In addition, it\\u2019s also important to understand a few basic metrics that let you gauge a company\\u2019s stock price relative to its financials\\u2014terms such as book value, dividend yield, price-to-earnings ratio (P/E) and so on. Understand how they are calculated, where their major weaknesses lie and where these metrics have generally been for a stock and its industry over time,\\xa0 so you can compare a company\\u2019s stock valuation relative to its fundamentals and relative to its competitors or the market as a whole.
While you are learning, it\\u2019s always good to start out by using virtual money in a stock simulator. Most likely, you'll find that the market is much more complex than a few ratios can express, but learning those and testing them on a demo account can help lead you to the next level of study.

* Playing Penny Stocks and Fads

Let\\u2019s talk about penny stocks. At first glance, penny stocks, which literally cost less than a dollar per share, seem like a great idea to invest in. With as little as $100, you can get a lot more shares of a penny stock than of popular companies such as Facebook that costs about $136 per share or Google that costs $830 per share\\u2026 right? And, you may be tempted by the sizable upside if a penny stock goes up by a dollar.
But remember: a penny stock is a penny stock for a reason. The market doesn\\u2019t believe the company warrants a higher valuation and that the company may not offer much future gain. What penny stocks offer in position size and potential profitability may reflect high volatility and poor expected returns. So even if you buy a stock for 50 cents, its higher volatility means you could end up losing the entire 50 cents should the company tank."