Investing in the stock market can bring in some impressive gains. And it is the prospect of becoming incredibly wealthy in a short period of time that encourages numerous people to invest in stocks. However, the opposite is also true – you can lose all your capital in the blink of an eye if you are not careful. This is why every stock investor must watch out for the following five things.
Beware of ‘Hot Tips’
A ‘hot tip’ is essentially a trade signal that you received from an acquaintance that promises to make you incredibly rich if you just go ahead and invest in the trade. Reputed investor Arthur Penn warns that one should generally stay away acting impulsively on such hot tips. Instead, you should do a proper fundamental and technical analysis of a company before ever investing in it. Acting impulsively on a hot tip and investing all your capital in that trade can easily wipe out that capital in no time.
All profits you make from investing in stocks are taxable. As such, it is important that you take this factor into consideration when deciding on an investment. The return you get from investing in a company should easily net you a substantial profit after payment of taxes. If you neglect to consider the taxes, then it can end up negatively affecting the profitability of your investment strategy.
Be Wary Of Penny Stocks
Another thing to be wary of is penny stocks. According to investment firm Arthur Penn Pennant Park, penny stocks require extra research in order to be considered worthy of investment. This is mostly because such companies are usually new and small in size. As such, they are more likely to go bust than a business which has been operating for decades. So, just as with a hot tip, never blindly trust a penny stock opportunity without doing a thorough research on that business.
Don’t Be Blinded By Immediate Gains
Even though it is true that you are investing in stocks to net a profit, you should never be too blinded by immediate gains that you forget looking at the long-term outlook of a company. If the long-term outlook is kind of uncertain and you are not sure whether the business will even be operational in the next few years, then any short-term investment opportunity that comes across is best avoided. Only invest in companies whose long-term outlook promises stability.
Invest For Profit, Not For Your Ego
Some people tend to be very emotionally involved in a trade. And as far as investing is concerned, emotional decisions are a strict no-no. Remember that you are investing for profit, not to satisfy your emotions or your ego. If you see that a trade is going south, then pull out of it immediately. Don’t let your fear of accepting your mistake stop you from exiting from the trade. If you let such emotions and fears take control over you, then all your investments will only end up making a loss. So, learn to keep your ego and emotions in check when investing in a business.