Pitfalls To Avoid When Investing In Stocks

Foreword from ShareInvestor

This article “Pitfalls To Avoid When Investing In Stocks” by Lorna Tan was first published in The Sunday Times on 13 Jul 2008 and is reproduced in this blog in its entirety.

Relying On Hot Tips And Rumours

This is not a systematic way of investing. Relying on saucy speculation means you’ll invest with your heart rather than your head, leading to impetuous decisions.

Investment should be based on fundamentals which you should have satisfied yourself about through research. They include understanding the business model and the firm’s cash flow.

Not Having An Investment Plan

Such a plan should outline specific goals and the timeframes in which you hope to achieve them, said Mr Stephen Tan, the Singapore Exchange’s vice-president for private investors. For example, if a stock plummets, you should have an idea of whether you want to hold on, or exit and cut your losses.

Also, you might want to decide in advance the types of firms you want to own stocks in: long-term growth companies or blue chips.

Not Fully Understanding What You Are Investing In

Failing to obtain information about a firm before investing in it is a very common mistake.

Some investors buy stocks in a company without knowing enough about its main products or its prospects, said Mr Ben Fok, chief executive of Grandtag Financial Consultancy.

Investing With Borrowed Money

Invest only the amount that you can afford to lose. In other words, you should not borrow on margin to invest, said IPP Financial Advisers’ investment director, Mr Albert Lam.

You must work out how much money you can comfortably invest and how much you can risk losing should your investment go awry.

“Investment needs time to play out, and selling stocks to pay your bills is the worst reason out there,” said Mr Joe Tiong, an equity sales trader at Phillip Securities.

Overtrading, Or Buying And Selling Too Often

This is not advisable as the transaction costs will add up and ultimately eat into the returns from your investments.

Following Analysts’ Recommendations Blindly

It is not good policy to buy and sell shares based purely on the target prices provided by analysts. Read the reports but make up your own mind.

Being Impatient When Seeking Profits

It pays to be patient and to monitor the price of a stock for a period of time before buying it.

“Investing is fairly long-term in nature, and contrary to popular belief about quick gains, it pays to look at price trends,” said OCBC investment research head Carmen Lee.

“It pays to be patient, so you can buy when the price dips and sell into price strength.”