August 29, 2014

Share Investing Mistakes

Share investing is often an exciting and intriguing proposition, although it is important to avoid making some rather common mistakes. These mistakes can include the following when investing in shares;

  1. Buying what are deemed to be the most popular stocks – Certain shares amongst the FTSE 100 nearly always dominate the headlines and ‘most traded’ charts. However, just because others are buying or selling these particular stocks, it doesn’t necessarily mean that you should do exactly the same. Sometimes within investing, there is a pressure to ‘conform’, although it must be understood that there is no ‘sure thing’ when it comes to investing and investors will have various reasons for buying or selling popular stocks. Likewise, there are thousands of possible stocks to invest in across the FTSE 100, FTSE 250, AIM and International indexes, limiting your share investments to just a select few companies could be limiting your opportunities.
  2. Investing in the unknown – You should avoid investing in the unknown, because if things go wrong, you will struggle to understand why. Any decision is best made when it is a fully informed one, based on all the possible information available. The classic saying is that you should normally invest with what you know. But this doesn’t mean to say that you should invest in companies that you immediately know of. There are companies across multiple sectors, and with a bit of hard graft and effort, it won’t take too long for you to build up your knowledge amongst other sectors and companies.
  3. Averaging down - Averaging down has its pro’s and con’s like with most techniques. The logic is that by buying more shares that have fallen in an existing investment, you will break-even quickly when the shares ‘rebound’. However, the clear disadvantage here is that there is always the possibility that the stock will never rebound and you will continue to back a losing stock. The more money you invest in a particular stock, the more your money is locked down which also brings with it a lack of a diversification.
  4. Assumptions on how cheap a share is – If the price of a share is 20p as opposed to £2, that doesn’t mean that the 20p is better value for money. This is because the share price is derived from the value of a company dividend by the total number of shares in existence. For example, assume two companies are both worth £20m. However the share price of company A is far lower than company B, this is because it most likely has more shares in existence which is simply bringing down the price of each individual share.  There are a number of techniques that can be used to truly assess the ‘cheapness’ of a stock, and these include the PE ratio and the more popular PEG ratio.