Q: I recently opened my first brokerage account, but I'm worried that I'll make some rookie mistakes. What are some common mistakes beginning investors make, so I can be sure to avoid them?
While mistakes are a great way to learn, it's generally better to learn from the mistakes of others and not your own. Here are five costly errors to avoid.
The first is investing in "penny" stocks, which I loosely define as stocks that trade for less than $5 or aren't listed on the NYSE or NASDAQ. While there are some legitimate companies in this category, there are far too many scams (think The Wolf of Wall Street). Stay away.
The second is investing too much money in one, or just a few stocks. Investing in one stock is great when it's going up but can be a nightmare when it's doing poorly. Either spread your money out over at least five high-quality stocks, or stick to index funds.
The third mistake is investing in "the next big thing" rather than investing in high-quality companies. Too many people I know lost money chasing GoPro, Blue Apron or Lending Club simply because they were "cool" stocks.
Fourth, avoid investing on margin, which means borrowed money. Doing so can double your gains but can also double your potential losses.
Finally, even as an experienced investor, I never put my money into a company that I don't fully understand. The largest companies in my own portfolio — such as Realty Income, Bank of America and Apple — all have businesses that can be easily explained in a sentence or two.
Matthew Frankel owns shares of AAPL, BAC and O. The Motley Fool owns shares of and recommends AAPL and GPRO. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.
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