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Saturday, September 21, 2013

Six Moves Which are Dangerous for First Time Investors



First time investors whether it’s in currencies, stocks commodities or bonds should make low risk investments by using small amounts of capital.

Introduction:
Nowadays anyone that has a computer and has access to the internet and an online bank account has the ability to trade stocks and currencies almost immediately. This has meant that many investors now don’t have to rely on mutual funds or other money managers to manage their investments for them as they can now trade and manage their own investments. Unfortunately, to be a successful investor there is many pitfalls that first time investors should be wary of.

Six Moves which are Dangerous for First Time Investors:
The basic theory of all Forex traders is to buy low and sell high however the key thing is to able to recognize whether a stock or a currency is undervalued or overvalued, to read up on technical and fundamental analysis, recognize a diversity of ratios and metrics. The bottom line is that investors should not jump into the markets feet first without careful preparation and study. The investor needs to understand that the same metrics given to the seller and the buyer will produce different conclusions which lead to a different strategy.

Another mistake which is often made by investors is to trade right away with their own money. This is a major error because until the investor has learned and mastered the p/e ratios, dividend yields and book values for stocks and technical and fundamental analysis for currencies it is wise to practice investment/trading strategies on a dummy trading account. As you get better and test more complex strategies on a demo account you can analyze the results without being afraid of losing your hard earned money.   

First time investors tend to look for what they believe is easy profits. Stock investors look at penny shares and see opportunities to make a lot of money quickly. Why buy 4 $25 shares and make a profit of $2 per share because they went up by $2 for a total of $8 when you can make $200 if you bought 100 $1 shares and they went up by $2 each. Sounds easy stock doesn’t it? Unfortunately, ‘penny stocks’ are prone to extreme volatility and whereas they can rise aggressively they can also fall aggressively and cause the investor to lose all his money. This one characteristic makes ‘penny stocks’ a bad option for investors who are still learning the ropes. In the currency markets this is akin to investing in minor currencies which due to illiquidity can make large swings. Again the swing could be such that the investors capital is wiped out.

Another dangerous move is not diversifying in any market, whether it’s in bonds, currencies, commodities or stocks. Putting 100% of your capital into one market is not the best move an investor could make. It is always prudent to risk a small amount of capital at a time. In this way mistakes are minimised cost wise while lessons are learned.

While using leverage seems like a good idea as the investor can invest a smaller amount of capital than would be necessary for the same profit potential. It is also works the other way as there is a risk that the profit potential is the same as the downside potential. The new investor if he is going to leverage should do it in small increments.

Never put all your cash into the market. Keep some set aside for emergency use or to take advantage of investing opportunities in the future. It is better to have a portion of liquid funds not earning anything than having all your liquid funds in danger of being wiped out.

Low risk investing requires having done your homework through technical and fundamental analysis. This takes the guesswork out of investing and makes it more likely that your investments will be sound. Never invest in rumours for in most cases they are just that, and don’t have any sound economic or business sense.

If you as a new investor can avoid these six dangerous moves and invests wisely using small amounts of capital then you will begin to have good returns on your investments.

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