• Home
  • Investing
  • About
  • Contact
Menu

Economix101

  • Home
  • Investing
  • About
  • Contact
EraseMistakes.jpg

Make The Right Bets

April 30, 2014

As I reflect on my three years of investment experience, I realize that I've done many things correctly. However, I also understand I've made my share of mistakes. I'm not at all upset with the errors of my past, as they've provided me invaluable insight into how the game is played, and are part of the learning curve associated with the stock market. Although I encourage people to push their limits when learning a new activity, investing is different. Since you have "skin in the game," I figured I'd share my most valuable piece of advice with you, so that, as an amateur investor, you can avoid some of the pitfalls I encountered (also read Getting Back To Basics).

Plain and simple, don't invest in small cap or cheap stocks. As a beginner, this can be extremely tempting, after all, why buy two shares of company A for $100 when you can purchase 10 shares of company B for the same price? In theory, the latter produces a much higher return on investment (ROI), but this is only true if you're skilled in active trading practices. The truth is, these cheap stocks are often associated with small cap companies. What this means, with the exception of a few big names that have declined over time, is that such companies tend to be highly volatile (meaning that large price changes frequently occur). As a result, you stand to make a lot of money, but will arguably, as a beginning investor, lose even more.

As a new investor, you should focus on long-term growth (it’s a much simpler concept). With this focus, it is in your interest to invest in large cap, more expensive stocks. Although your ROI will be smaller, the fact of the matter is that, like me at the time, you don't have the skills necessary to invest in cheap stocks. You may think that low cost stocks function the same way as high cost stocks, but I'm here to tell you that they don't. It takes much knowledge and skill to make money on small cap investments, and yes the ROI is huge, but so to is the risk.

Cheap stocks don't necessarily adhere to the same principles as expensive stocks, based on the obvious fact they're far less costly. Investors who trade such stocks are not engaged in patterns of trading similar to amateur investors. Instead, these skilled traders engage in short-term investment practices, such as "shorting" stocks and purchasing options. Hence the extreme volatility of small cap companies.

Such bets may payoff for skilled investors, but they leave you screwed. Even worse, after witnessing a decline in your investment(s), you may be unwilling to further invest in the stock market. This is bad! So, instead of making these costly mistakes, here's my advice to amateur investors: buy fewer shares in stable, large cap companies with proven growth (they tend to be less volatile). If you can, find companies that also pay generous dividends (read Dividends For Dummies), like Cisco (CSCO) or, after its split, Apple (AAPL). This way you will at least receive a small ROI, regardless of how the stock performs.

In Advice, Career, Education, Markets Tags Cisco, Apple, Dividends, Options, Shorting, Volatility, Security, Fundamentals, Stocks, Investing
← The Largest IPO In History?Stock Talk →

Show Your Support

Please help us achieve worldwide financial literacy. Everyone deserves an economic education; follow and share our content across social media so that we aren't forced to advertise. Thanks.

Make & save money with Wealthfront.

Home RSS
Trending Authors
  • Jackson Moses
  • Ryan Vertelney
  • Zac Cherin
  • Spencer Drazovich
  • Jacob Grant

Trending Articles

Home
Dear World, LinkedIn Is Not Facebook
Dear World, LinkedIn Is Not Facebook
about 9 years ago
15 Reasons To Love Alibaba Stock
15 Reasons To Love Alibaba Stock
about 9 years ago
You're Missing Out On $100,000s
You're Missing Out On $100,000s
about 9 years ago
Building America's Next Bomber
Building America's Next Bomber
about 9 years ago
Uber Beats Facebook To $50B Valuation
Uber Beats Facebook To $50B Valuation
about 9 years ago
Marshawn Lynch Stars In Black Ops
Marshawn Lynch Stars In Black Ops
about 9 years ago
Taylor Swift & Apple Have Bad Blood
Taylor Swift & Apple Have Bad Blood
about 9 years ago
Netflix Is On Fire
Netflix Is On Fire
about 9 years ago
Who Actually Owns Jack Daniels?
Who Actually Owns Jack Daniels?
about 9 years ago
America's Most Secretive Company
America's Most Secretive Company
about 10 years ago

Home RSS

Brief Disclaimer: Economix101, Inc. is not an officially licensed analyst/research firm; moreover, investing is a risky endeavor. There is no guarantee that you will make money. There is a very real chance that you will lose money. This site, and its many contents, is to be used as an investment research tool, and nothing more. Please consider all risks before investing. All decisions are made of your own volition. By using this site, you agree to the following terms set out in the below "Terms of Service" agreement, specifically that Economix101, Inc. (and its affiliates) is not responsible for any sustained losses directly or indirectly associated with this site.

Terms of Service  |  Privacy Policy  |  Social Media

Copyright ©2015-2020 Economix101, Inc. All Rights Reserved.