Key Mistakes to Avoid When Investing in Stocks for the First Time

Lack of Research and Clear Planning

When starting to invest in stocks, the lack of research and clear planning is one of the most serious mistakes that many new investors make. According to a study by Morningstar, 70% of individual investors fail to achieve superior returns compared to the market in the long run, mainly due to the lack of strategy and understanding of the factors affecting stocks. The initial excitement can easily cause you to jump into the market without taking the time to thoroughly research. However, without a clear strategy or goals, you are likely to make decisions that lack solid foundations. This can lead to risky investment choices, such as investing in stocks with no growth prospects or in areas that are unfamiliar to you, thus increasing your risks.

KTGA has met many people who invested in stocks of companies with weak financial foundations simply because they trusted advice from friends or unreliable experts. A typical example is when many investors flocked into tech startup stocks at the beginning of 2021 without thoroughly reviewing the financial health of these companies. As a result, many of these companies had to adjust their business plans, causing the stocks to drop significantly and leading to losses for inexperienced investors.

To avoid this mistake, KTGA advises you to create a clear investment plan from the outset. A good plan includes long-term goals, a strategy for choosing stocks based on thorough research into the company’s financial health, growth potential, and macroeconomic factors. For example, if you decide to invest in a company, consider financial indicators such as debt-to-equity ratio, gross profit margin, or revenue growth over the past few years. Additionally, you should have a risk management strategy in place, such as determining the level of risk you are willing to take and using stop-loss orders to minimize potential losses.

Over-Focusing on Emotions

One major mistake many new investors make is allowing emotions to influence their investment decisions. According to a study by Nobel laureate Daniel Kahneman, emotions can lead to poor decision-making, especially when greed and fear take over. Greed can cause you to buy stocks when the price is already too high, hoping for further profits, while fear can make you sell off stocks when prices are falling, even though it could be an opportunity to buy at lower prices.

This often happens when investors don’t have a solid long-term strategy. Instead of acting according to the plan they established from the beginning, they react quickly to short-term market fluctuations. These decisions are usually impulsive and lack solid reasoning, often resulting in buying high and selling low, leading to losses.

A concrete example is during the COVID-19 pandemic, when many stocks dropped sharply, some investors hastily sold off their stocks due to concerns about the continuation of the pandemic, rather than seeing it as a long-term investment opportunity when the companies’ fundamentals remained strong. Those who stayed patient and stuck to their long-term strategies benefited when the market eventually recovered.

To avoid falling into the emotional trap, you need to create a long-term investment plan, which includes steps to handle situations when the market fluctuates significantly. Having a clear strategy combined with discipline in sticking to that plan will help you avoid being swept up by emotions, leading to wiser decisions in the long run.

KTGA also encourages you to study investor psychology to better understand how emotions can influence your investment decisions. This awareness can help you avoid making mistakes in moments of panic and instead make decisions based on data, not emotions. To control emotions, you could set clear investment goals and establish limits (such as stop-loss orders or profit-taking targets) to protect your assets and keep yourself from being overly affected by short-term market fluctuations.

With these mistakes in mind, KTGA hopes you will find the guidance and strategies to avoid them and become a smarter investor. Remember, investing is not a short sprint but a long-term journey that requires thoughtful decisions, based on solid research and patience at every step

Not Managing Risks and Transaction Costs

One of the most significant mistakes new investors make is failing to manage risks and transaction costs. Often, they overlook the importance of risk management strategies such as setting stop-loss orders or fail to calculate transaction costs effectively. According to a report from the CFA Institute, nearly 40% of individual investors do not use stop-loss orders, leading to avoidable losses during market downturns. Without a solid strategy in place, unexpected market fluctuations can quickly wipe out gains and increase potential losses.

KTGA has seen many investors who dive into the market without preparing for the possibility of a downturn. For example, in 2020, during the market crash triggered by the COVID-19 pandemic, many new investors were left holding on to stocks as their prices plummeted because they had not set stop-loss limits, hoping that prices would recover in the short term. However, this led to devastating financial consequences for those who failed to take timely action.

To prevent such losses, it’s crucial to develop a clear risk management strategy from the outset. Stop-loss orders are an effective tool in limiting losses if a stock falls below a certain price. For example, if you purchase a stock at $100, you might set a stop-loss order at $90. If the stock price drops to that level, the system will automatically sell it for you, limiting your losses. This way, you protect your capital and avoid emotional reactions during market swings.

Additionally, transaction costs should not be overlooked. Many new investors focus only on the potential profits and ignore fees like brokerage commissions, spread costs, or even taxes, which can add up over time. According to NerdWallet, high fees can cut into profits by as much as 1-2% per year, especially for frequent traders. To minimize this, investors should carefully choose low-cost brokerage platforms and factor in the impact of transaction costs when deciding on their investment strategies.

Investing Too Much in One Stock and Lacking Patience

Another common mistake that many first-time investors make is putting too much of their capital into a single stock and lacking patience when waiting for long-term growth. Concentrating your investments in one stock is risky because if that stock underperforms, you may lose a significant portion of your capital. On the other hand, diversifying your investments across different assets helps reduce risk and smooth out volatility, as losses in one area can potentially be offset by gains in another.

KTGA has observed that some novice investors, in their excitement to quickly gain high returns, pour their money into “hot” stocks with the hope that they will rise quickly. Take, for example, the GameStop short squeeze in 2021, where many investors, especially newcomers, poured all their money into a single stock, driven by online hype. While some investors made quick profits, many others lost heavily when the stock price eventually crashed.

The key to mitigating this risk is diversification. Spreading your investment across various stocks, sectors, or asset classes (such as bonds or real estate) helps to lower the chance of major losses. ETFs (Exchange-Traded Funds) are an excellent tool for diversification, as they allow investors to invest in a broad range of stocks in one go, with minimal effort. By investing in ETFs, you can ensure that your portfolio is well-rounded and less vulnerable to the volatility of any single stock.

Furthermore, having patience is vital in the stock market. The reality is that stock prices don’t always rise in the short term, and it can take years for an investment to show significant returns. According to historical data, the S&P 500 index has consistently shown an average annual return of about 7-10% over the long term. But to benefit from this growth, you need to stay invested and avoid making impulsive decisions based on short-term fluctuations. Short-term volatility is normal, and history has shown that sticking with your plan through tough times can lead to greater rewards in the long run.

KTGA always emphasizes the importance of holding a long-term perspective when investing. Successful investors know that the stock market operates in cycles, and it’s essential to give your investments time to grow. The key here is patience and staying the course. Resist the temptation to check your portfolio every day and make changes based on every market dip.