10 Key Investing Mistakes for Beginners to Avoid

• Avoid stocks of bankrupt companies, penny stocks, and overhyped message boards. Don't try to time the market or day trade as a beginner.
• Pay attention to market conditions and how your picks are performing relative to the overall market.
• Be wary of stocks with unsustainably high dividends. Diversify your investments.
• Check the trading volume to avoid getting stuck in an illiquid stock. Have an emergency fund before investing.

When starting out in investing, it's easy to make mistakes that can be costly. Being aware of common pitfalls can help you avoid losing money and set yourself up for long-term success. This guide covers key investing mistakes beginners should watch out for.

1. Stay Away from Bankrupt Companies

If a company announces it is going bankrupt, avoid investing in its stock. The share price of a bankrupt company will often continue declining and eventually become worthless when the company folds. Even if you think the stock is undervalued, it is very difficult to predict when a failing company will finally bottom out. The shareholders usually get wiped out through the bankruptcy process. Don’t try to time these stocks or gamble on a recovery.

2. Avoid Penny Stocks and Over-the-Counter Markets

Focus your investing on reputable exchanges like the New York Stock Exchange and NASDAQ. Avoid buying penny stocks, which trade over-the-counter in pink sheets and bulletin boards. Penny stocks are highly speculative, thinly traded, and prone to manipulation. Over-the-counter stocks have failed to meet the listing requirements of major exchanges, which is a red flag. As a beginner, stick to quality companies on reputable exchanges.

3. Don’t Rely on Message Boards for Tips

Online investing message boards frequently contain bad advice from anonymous users promoting their own positions. Some users may intentionally mislead investors by hyping up stocks they already own in hopes of inflating the price. Take any tips from message boards with a huge grain of salt. Rely on trustworthy sources like financial news sites, company reports, and professional analysts.

4. Avoid Day Trading as a Beginner

Day trading involves rapidly buying and selling stocks within the same day to profit off short-term price movements. While experienced traders can be successful at it, day trading is extremely challenging for beginners. You'll be competing against professional traders with advanced tools and algorithms. Take time to learn about investing fundamentals and practice with smaller positions. Consider holding stocks for longer periods rather than intraday trading.

5. Don’t Try to Time the Market Perfectly

Even experienced investors struggle to predict market tops and bottoms. If you wait on the sidelines for a big crash before investing, you may miss out on years of gains. Have a plan to invest consistently, such as setting aside a fixed dollar amount each month. This dollar-cost averaging helps avoid investing everything at a peak. Stay patient and keep contributing even during downturns when stocks are on sale. Timing the market perfectly is impossible, so take an incremental approach.

6. Evaluate Performance Relative to the Overall Market

Don’t just look at your portfolio’s raw returns in isolation. Compare its performance to relevant benchmarks like the S&P 500 to get better context. If your stocks are down 5% during a period when the overall market fell 15%, you actually outperformed. If your picks only gained 15% during a huge 30% bull market rally, then you underperformed. Considering relative performance helps you accurately assess how your investment strategy is doing.

7. Look Out for Unsustainably High Dividend Yields

Some companies will pay extremely high dividends that account for a double-digit dividend yield. This can seem very enticing compared to the 1-2% yield offered by bonds and bank accounts. However, yields above 10% are often too good to be true. Companies cannot afford to pay so much more than they earn forever. Find out why the yield is so high. Often, an ultra-high yield is a sign of a company in distress. The dividend could be cut severely or eliminated entirely soon.

8. Diversify Your Portfolio

Never invest all your capital into just one or two stocks. Diversification helps reduce risks, since you won't lose everything if a single company fails. Enron and Lehman Brothers were respected blue chip stocks until they suddenly collapsed. Anything can happen, so spreading your investments across multiple companies and sectors is crucial. Diversification also smooths out volatility and improves your chances of being invested in the top performers.

9. Check a Stock's Average Trading Volume Before Buying

A stock's trading volume indicates how much investor demand and liquidity exists. Volume is the number of shares traded each day, often reported in dollar amounts. Be wary of stocks with thin trading volume below $10-20 million per day. If volume is too low, you may struggle to find buyers and have to accept a lower price when selling. You want to be able to exit a stock easily, so sufficient daily volume is key.

10. Have an Emergency Fund Before Investing

Don't put money into the stock market until you already have a liquid emergency fund covering 3-6 months of expenses. Without a cash buffer, you may be forced to sell stocks at an inopportune time to access funds during an unexpected crisis like job loss or medical emergency. Allowing time for your investments to ride out downturns is critical to long-term growth. An emergency fund prevents having to liquidate your portfolio at a loss when you need money urgently.

By knowing the most common investing pitfalls, you can avoid making costly mistakes and give yourself the best chance for success. Stick to quality stocks on major exchanges, don't try to time the market, pay attention to trading volume and overall conditions, and diversify your holdings. With prudent research and discipline, you will be better positioned to build wealth through investing.