If this post caught your attention, it’s whether you’re new to stock market investing or already experienced and then just curious if you’re making any of these mistakes.
So let me outline the seven mistakes I made so that you can avoid them.
Investing in Penny stocks
In my opinion, this is a very common one. People often take mental shortcuts because they don’t fully understand how the stock market works. You might think, perhaps in a naive and overly optimistic way, “Oh, if I buy XYZ stock at $0.45 and it goes up to $10, I’ll make a profit of $9.55!”
I don’t want to be a killjoy, but there’s very little chance of that happening. If XYZ stock is priced at $0.45, there’s a reason for it, whether the company is on the edge of bankruptcy, involved in a major scandal or suspected fraud, or has been recording losses for years and is overloaded with debt.
In a nutshell, penny stocks are NOT a good investment.
Chasing high yield dividend stocks
Like everyone else, I wanted to maximize my returns while minimizing the amount I invested. So, high-dividend-yield stocks seemed perfect for this, right? Well, once again, sorry to disappoint you, but this is wrong!
The higher the dividend yield, the less sustainable it usually is. Most of the time, a high dividend yield results from a recent drop in the stock price. The dividend yield works inversely with the stock price: when the stock price rises, the dividend yield decreases, and vice versa. If the price has dropped, it often signals that negative events have impacted the company, increasing the likelihood of a dividend cut.
In my opinion, with high-yield dividend stocks (typically above 5%), you get the worst of both worlds: the risk of poor stock performance and the possibility of a dividend cut.
Investing in a stock just because XYZ influencer or friend told you so
This is especially true when you see everyone talking about a stock. There’s hype, FOMO, and you end up following the crowd without analyzing the company. At the time of writing this post, Nvidia is the stock getting all the attention, it’s everywhere: on YouTube, in financial newspapers, and all over social media. So, should you go all-in on Nvidia? Certainly not!
When it comes to stock picking, you need to do your own research. Analyze the fundamental data: Is the business profitable? How long has it been profitable? Does it have a healthy net margin?
I also publish stock analysis , but you should use them as a starting point to dive deeper into the stock. (I repeat,do your own research.) Don’t invest blindly just because I said it’s a quality stock.
Buying a dividend stock on the ex dividend date and selling just after getting the dividend
On this one, we will get a bit more technical. When it comes to dividend stocks, there are 3 important dates to know :
📆 Ex-Dividend Date: The date at which the stock must be owned if you want to receive the dividend. (usually one business day before record date)
📝 Record Date : The date at which you are recorded as a shareholder.
💸 Payable Date: The date at which the cash dividend is indeed transferred to your bank/brokerage account.
In other words, If you want to receive the dividend, you need to be the owner on the day before the ex-dividend date.
Here an example with Microsoft (MSFT) stock:
So for Microsoft here, if you buy after the ex dividend date, 20 Feb 2025, you will not get the $0.83 dividend paid on 13 March 2025.
Now, knowing this, I naively thought I had outsmarted the market by earning a dividend simply by holding a stock the day before its ex-dividend date and selling it right after. But here’s the thing: the stock exchange reduces the stock’s value at market open by the exact amount of the dividend distributed. So, while you’ll receive the dividend, if you sell immediately after, you won’t make any profit because the stock price will have dropped by the dividend amount.
For example, let’s say Microsoft’s stock closes at $416 on February 19. The stock exchange will automatically reduce MSFT’s opening price by $0.83, resulting in $415.17 ($416 – $0.83) on February 20, 2025 (which is the ex-dividend date in this case).
The key takeaway is this: when a company pays a dividend to its shareholders, the company’s market cap drops by the exact amount of the dividend distributed.
Investing in mutual funds
Investing in actively managed funds might seem like an excellent idea at first glance. After all, they’re managed by experienced fund managers who have access to a team of professionals, including macroeconomists, financial analysts, and equity/valuation specialists. However, when you examine their performance, these funds often struggle to outperform the S&P 500.
According to a SPIVA research, 84.71% of large-cap funds failed to beat the S&P 500 index as of June 30, 2024. So, what’s the point of paying high management fees when you could achieve better results simply by investing in an S&P 500 index fund/ETF?
As we usually say, if you can’t beat the S&P 500, just join the S&P500! (via an ETF)
In my opinion, most mutual funds make investing seem like rocket science to convince you to invest with them and justify the high fees they charge.
Buying and selling too quickly
The ability to buy and sell stocks at your fingertips and in the blink of an eye is both a blessing and a curse.
I used to check stock prices every single minute, and after just one month, if I didn’t see any performance, I wanted to sell. I know for certain that I was not the only one making this mistake. According to the NYSE factbook, the average holding period for stocks has dropped from 8 years in the 1960s to less than 6 months in the 2010s. Additionally, low-fee online brokers don’t really help discourage this behavior.
What we need to keep in mind is that company sales and profit growth take time. If you’ll allow me the analogy, it’s a bit like your own income. How many years did it take you to double your salary? Five years? Ten years? or still in progress ? You can’t expect a stock to grow by 100% overnight if it took you five years or more to double your income. So, please be patient,investing in the stock market is more of a waiting game than a get-rich-quick scheme.
Not understanding the business behind the stock
This one is harder to get because sometimes, when you see the hype and notice sales and profits increasing, you think, “Well, maybe I don’t fully understand it, but the company’s sales and profit are growing, so why should I care?”
However, it’s crucial to understand the company’s business model, how they make money or plan to, before diving into the numbers. Without this understanding, you might miss potential risks hidden under outstanding growth figures, which could impact the business’ long-term sustainability.
That’s it for today! If you found this post helpful, please subscribe to my newsletter for valuable content on stock and dividend investing.
If you’re already a stock investor, I’d love to hear from you! Share the mistakes you’ve made in the comments—I’m curious to know.
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