5 Instant Investment Mistakes

You want to go broke fast?  Well, here are a few sure-fire ways to lose it all.  Avoid these five instant mistakes when investing in penny stocks, or any type of stock for that matter!

1. Tips from Friends, Relatives, Co-workers

No offense to your second cousin, or the lady three desks over from you, or whoever it was talking up the investment to you – they are wrong 29 times out of 30.  In fact, the more certain they are about the future of the investment, or the more emotionally they make their case, the more likely they are to be wrong.

Typically, the “hot stock” is simply a story spreading through the rumour mill (you know the rumour mill, it was the thing we used before Twitter).  Also, when someone is speaking specifically about the company at which they work, or a product they use, they may be involving their own pride, experiences, or ego into the recommendation.

2. Picks for Free

There is no single threat to investors bigger than this one.  We have spent decades warning as many people as we could:  Do not follow free stock picks, of any kind (see the section on Promotional Stocks).  Any penny stock you learned about online, or in an unsolicited postal mailing, or unexpected fax, is dripping with hidden motivations.

The promoter needs you to fall for their “pig in lipstick” routine, and actually invest in the shares.  They get rich selling the worthless stock as you buy, laughing as your money shrivels.

3. Business or Industry You Do Not Understand

People sink thousands into penny stocks they do not understand.

 For example, they may buy some biotechnology business, or the next disruptive technology penny stock, despite not understanding anything about the company or the industry.

If you understand a certain nanotech business, or the industry for 3D printing, or gold mining development, then by all means use that advantage to invest in the space.

 However, if the concept is complicated or confusing to you, your trading will almost certainly end up with ugly losses.

4. Not Using Risk Money

An ancient proverb states that, “you will eventually lose all you gamble with.”  This is true of gambling, and it also applies to investing in penny stocks.  In fact, many argue that the stock market is just another form of gambling, and is no different from a casino.

Well, unlike a roulette table, it is possible to tilt the odds in your favour in stocks.  Understanding businesses, and knowing what to look for in investments, can make a major difference.

The problem arises when an investor buys an asset with money they can not afford to lose.  Just like at a casino, you should never be using grocery money or your child’s education fund.  Even when penny stocks act as you expected by rising in price, they very often take much longer to make their move than you expect.

For example, on many occasions I’ve bought penny stocks which took several years to multiply in value, when I originally anticipated a profit within months.