Investing takes skill and experience. Most investors being with neither of these qualities - including me. In hindsight, it is easy to remember where I went wrong when I first started, and what errors I could have avoided. I was new to the world of investing and I thought that it would be much easier than what actually panned out. Over time, however, I learned more through trading with real money than I did with playing the ‘stock market game’ in my high school business class. To put it bluntly, I made some rookie mistakes and I learned from them - the hard way. If you are interested in getting started in investing, here are some things to keep in mind when buying your first stock.
Don’t trust your gut.
We have all heard or said the saying “go with your gut” countless times in our lives. But in this case, this is something you should stay away from like the plague. Stocks can be a fairly complicated thing to gauge and making an informed decision about a trade requires much more than just a ‘gut feeling.’ The movement of stocks are indifferent to any feelings or bias you may have towards them and if you use anything except your brain to pick a stock then the odds are heavily against you.
Don’t put all of your eggs in one basket.
Or in other words, absolutely do not put all of your money into one stock. In fact, this is one of the most severe mistakes you can make when trading. The stock you just put your money in looks good? Not anymore! The earnings report missed by only two cents, leading to a loss of half its value. This isn’t a made-up scenario either - one example could be what happened in March 2017 with Xtant Medical Holding’s stock (XTNT). In a fleeting moment, you could be in the red by hundreds or even thousands of dollars. If this does happen to you, though, there is some good news. Most stocks recover from a fall and over time you will likely find your way back to equilibrium.
Play it safe.
This is your first time trading stocks and there is no need to get greedy. If you get lucky and your portfolio almost doubles in value, then sell. You will be tempted to hold onto it and keep the gains rolling in - maybe you will develop an emotional attachment to it. But, as I said earlier, stocks are indifferent to your feelings or bias. If your chosen stock explodes overnight, there will likely be a pullback in price. If you hold on even longer, investors may become panicked and oversell the stock, leading to you losing your hard-earned money.
This ties into the boondoggle called ‘holding through an earnings report’ - another blunder that many other green investors and I found out about through experience. Companies will often give preliminary earnings reports that give the impression that the actual earnings report will be fantastic. Unfortunately, these can be quite misleading and can lead you to the red if you hold it. For the sake of your bank account, be cautious and sell before the earnings report.
Research and analyze.
This is the most important thing to do when buying a stock. Before making any trade, make sure to look up any news articles about your chosen company. Do most news articles give this company a positive or negative appearance? Did a recent product fail? Is there hype for an upcoming product? Are they being bought out? These questions, among many more, are ones you should know before investing. Another thing that will be useful in making a decision is to know who comprises the leadership of the company. Knowing whether or not the CEO has a good history of success and a vision, or if they are completely incompetent, is imperative.
Some basic technical analysis will also come in handy for determining a stock’s potential value. Technical analysis is the term used to describe the financial analysis of a stock to search for patterns and trends that could be used to make predictions on said stock. A popular website to conduct this on is StockCharts.com, a free platform open to investors that wish to analyze any listed stock. A helpful guide to get you started on technical analysis would be StockChart’s ‘ChartSchool’, a free guide to the functions of their analysis tools.
These are all things that you should keep in mind when purchasing your first stock. I may not have known what to do, but I learned from my mistakes. Once you have completed the basic steps to your first investment, just remember one last thing - buy low, sell high.
Sources:
“5 Reasons I Don’t Hold Through Earnings Announcements - New Trader U -.” New Trader U, July 23, 2013. http://www.newtraderu.com/2013/07/23/5-reasons-i-dont-hold-through-earnings-announcements/.
Tuchman, Mitch. “Ignore Your ‘Gut Feeling’ About Stocks.” Forbes. Accessed July 25, 2017. https://www.forbes.com/sites/mitchelltuchman/2013/04/22/ignore-your-gut-feeling-about-stocks/.
“Overview [ChartSchool].” Accessed July 25, 2017. http://stockcharts.com/school/doku.php?id=chart_school:overview.
“Xtant Medical Holdings Inc.” MarketWatch. Accessed July 25, 2017. http://www.marketwatch.com/investing/stock/xtnt.