There are so many reasons to buy a stock, but the truth is quite a few of them that investors use makes very little sense whatsoever. Every single stock purchase should be thoroughly researched and there should a clear catalyst or reasoning for precisely why you are purchasing the stock. If you don’t do your research and do things correctly, you are liable to end up with one of the following very poor reasons for buying a stock.
5 bad reasons to buy a stock:
- The stock’s price is so low – It is tough to take when you hear so many people who seem to think that when a stock is priced at less than $10 a share it is automatically cheap. Investors who don’t understand that a simple method of picking those stocks that are priced so low isn’t a winning strategy will be in for a rude awakening in the long run.
- A newsletter said to buy the stock – There are numerous newsletter sent out in the mail to investors that are touting potential huge stock winners and trying to talk you into making the investment of your money. The truth is many of these newsletters are touting their own stocks so that they can be propped up artificially and then they can sell them for a profit. This is especially true when you are dealing with penny stocks, which are very easy to move.
- The stock can’t possibly get cheaper – While looking for stocks that have been beaten down is typically a good idea, simply finding a stock that has plunged and deciding it can’t possibly get cheaper is extremely dangerous. There are millions of investors who have been crushed by this simple mentality in the past year or two. A stock that has been crushed can always get cheaper, and you’d do well to remember that.
- The stock has terrific momentum – There are some professionals who are able trade in and out of momentum stocks quite well, but for most investors playing a stock that has great momentum is a losing proposition. Momentum stocks can go great for quite some time, but when the momentum stops it usually turns ugly in a hurry.
- It’s my favorite – Stocks are things you don’t want to get personally attached to. If you have a favorite store or favorite product from a certain company then by all means you should research that particular stock and see if it is worthy of an investment. The problem is many beginning investors make a portfolio of their favorite companies or local companies. Blindly selecting stocks because of your personal preference is a very bad habit!
Stocks are a powerful investment option when used correctly, but many people can get hurt badly if they are buying stocks for the wrong reasons. If you are investing in stocks for any of the above reasons I highly suggest you reconsider before it is too late for your portfolio.
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Aaron K. Smith is a freelance writer with experience working in the mutual fund industry and writing about investing and the stock market. View all posts by Aaron.