Common Pitfalls in Stock Investing

Common Pitfalls in Stock Investing

By Jeff Neal, Optionetics.com

As many investors have discovered over the years, there are several tactical and timing mistakes that can be made regardless of how strong and great the investor thinks that particular company's stock might be. This article will attempt to address some of the more common mistakes the investor might encounter.

Many times an investor can make a good, but late, choice and jump in during market enthusiasm. For example, the investor may buy as part of a crowd right after a positive story in Barron's or a slick ad campaign during the Super Bowl, essentially allowing the investor no particular room for gain. Plus some investors make the mistake of falling in love with a particular company or concept. By doing this, investors allow themselves to overpay even for its strong growth. They are buying from earlier entrants who now see this stock as fully priced.

In addition, sometimes investors do not consider current Wall Street expectations. For instance, say a company's earnings have been rising and are expected to be up in the next quarter so the investor buys in being totally unaware of the huge Earnings Per Share, or EPS, increase being counted on by institutional momentum players in the upcoming report. Now, even though the company indeed does have a very good quarter but one that still misses the now elevated analyst's consensus by a penny or two, the stock plummets and the investor takes a quick 20 to 30 percent paper loss.

A similar situation is when a recently hot momentum stock that is in the same sector issues a subpar sales or earnings report, pulling down the entire group and moving money out of the investor stock's industry to others. In this case, even though the investor's particular stock was unblemished, it was still crushed by this related equity. Investors often take too long to learn that they paid a high price-to-earnings ratio for this particular company's earnings. Basically, the investor puts their capital into a company for a high price just before it loses sponsorship and further price increases. Now the company needs even better fundamentals to attract back the institutions.

It is also important for investors not to be so impressed with the company's fundamental merit that they overlook the crucial price importance of institutional investors' already large positions. They believe so much in the story that they ignore the fact that when 80 to 85 percent of a stock is held in big blocks, there are no new big sponsors to be found. Basically, the stock is already fully priced.

Finally, investors seem to always be buying at the top of a major bull swing. Even though the company's fundamentals remain terrific, its stock cannot withstand a bear market that commences and might run for a year or more. These are just some of the more common mistakes that beginning investors often make. The next time you choose a stock with a bullish bias review these potential pitfalls in an effort to avoid unnecessary losses.

Happy Trading.

Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent

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