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.