3 investments that could crush new investors’ dreams of getting rich
It is the dream of every new investor: to become rich on the stock market.
But for every investor who got rich on the stock market, there are a handful of investors who did not. While the volatility of stocks can certainly shatter a new investor’s dreams of getting rich quick, it often comes down to What you choose to invest, especially when you are just starting out.
If you’re looking for investments to avoid, here are three that top the list.
Penny stocks are basically companies whose shares are trading at $ 5 or less. They are generally young start-ups with commercial potential but a significant lack of funding or cash reserves. Whatever the reason for their small size, stock companies generally struggle to take off – often, folding in on themselves and going bankrupt.
How can you get rich with penny stocks? It is a short term trading strategy. Basically, you are buying a huge number of stocks at a low price. If the stock price goes up a few cents, you immediately sell your stock and pocket the profits. Many penny stock investors, if successful, will only make a small profit per trade. The idea is that if you can profit from a dozen penny stocks a day, you can make a pretty good sum.
This poses a lot of problems, but the number one challenge is consistency. While you can successfully identify a penny stock that will rise in price overnight, rare is the person who can do it successfully enough to make the business worth it. Those who do are professionals, and they will spend a tremendous amount of time and energy picking out the best penny stocks from the losers.
As a beginner, I would avoid penny stocks altogether. Stick with companies you know, like Shopify Where Amazon, and save penny stock by investing for the pros.
A microcap stock is a company with a market capitalization (the total number of shares multiplied by the current price of a share) between $ 50 and $ 300 million. In other words, it really is, really small.
Like penny stocks, many microcap companies are young start-ups whose products and services haven’t quite caught on yet. They may have an explosive business idea or a market disruptive product. Either way, micro-cap stocks are generally far from making a profit.
Due to their small size, micro-caps could present a fairly lucrative investment opportunity. If you can identify a small business that will explode in the long run, you could earn big money. But that’s the challenge – identifying good micro-capitalization. For every micro-cap that succeeds, there are hundreds more that fail. And, for newbie investors, it can be downright difficult to distinguish between the two.
As you become more adept at valuing stocks using metrics like P / E ratios and P / S ratios, you may want to add micro-cap growth stocks to your. wallet. For now, however, I would stick to less risky stocks, such as blue chips and large caps.
Short-circuit an action
Selling a stock short is essentially a method of betting against the stock market. Essentially, you are betting that the price of a stock will drop at some point in the future.
It works like this: you open a position by borrowing shares of a stock that you don’t own. You don’t own it. You to borrow it from another investor (usually your broker), and you will need to return it at some point in the future.
After borrowing shares of a stock, you sell them to another investor at the current price of the stock. You keep the money and wait. If the stock does drop, you can buy back your stock, return it to your broker, and keep the profits.
For example, let’s say you think A stock, which is trading at $ 50, is overvalued. You borrow 10 stocks from your broker and sell them to another investor for a total of $ 500. Let’s say the stock goes down to, say, $ 40. You buy 10 A shares (at $ 400), return the 10 shares to your broker and pocket the $ 100.
Sounds like a good investment, right? If you’re guessing right, then it is. But what if you are wrong? Well, that’s when it can start to get ugly.
Let’s say that instead of going down, stock A goes up. After a few weeks, the stock price hit $ 60. You wait. A few weeks later, the stock price hit $ 70. The A share company has taken a big step forward and you decide to buy back the share before the price goes even higher. You buy 10 stocks (now $ 700), return them to your broker, and absorb the loss of $ 200.
Again, like with micro caps, short selling a stock can offer you big rewards. But you have to know what you are doing. If you don’t, your losses could be even greater.
Are these three investments always Wrong?
No. In fact, many investors have gotten rich from micro-caps, short selling and, yes, even penny stocks. The point I’m trying to make is that each of these is a lot riskier than investing your money in blue chips, large caps, and even exchange traded funds. If you are new to investing, I would start by getting your feet wet with stocks and individual funds. Once you’re comfortable choosing stocks wisely, you can move on to more advanced investing techniques – if you want to take more risk, of course.