Why You May Be Playing with Fire: Nine Good Reasons NOT to Buy a Stock
Investing in stocks can be a great thing, especially if you do so with a well-thought out plan that ensures you don’t have all of your eggs in one basket. But many folks jump into buying stocks for the wrong reasons. Here are nine good reasons NOT to buy a stock.
1. Because you like the name of the company
This is pretty much the equivalent of picking a company at random and giving them money. It’s important to know more about a company than just its name. (How is it doing financially? What sector is it in, and how is that sector expected to do in general? How has the company performed in the past? What are its plans for the future?) Picking based on the name doesn’t work for football pools either. I’ve tried it.
2. Because you, a friend or a relative work(ed) at the company
It might be a great company to work for, but that doesn’t necessarily translate to financial success for investors. You especially don’t want this to be your only stock. (Think Enron.) And again, it’s important to do research on the company before investing.
3. Because everyone says it’s a good stock
“Everyone” said that real estate always goes up, and we all saw what happened with that. The herd mentality is not a reason to invest in a stock. In fact, it can be a reason to run in the opposite direction.
4. Because you use the product
This actually might be a reason to consider buying a stock. After all, it’s nice to know that people use a company’s product. But buying based solely on this point alone is akin to not doing any research on the company or the current market. Not a good basis for a purchasing decision. (See Why Invest in What You Know is Bad Advice.)
5. Because the stock has a cute, easy-to-remember symbol
Once again, this is buying without doing any research, hoping to randomly hit a good stock out of the thousands of stocks out there. It doesn’t matter whether the symbol is cute or not; it matters whether the stock is profitable or not, and whether the company behind it is in good shape.
6. Because you randomly got a hot tip about a stock in your email
Most likely, the “hot tip” is being sent out as part of a pump & dump scheme. That is where someone who owns the stock tries to artificially pump up the price so that they can make a quick buck when they dump the stock. Don’t get suckered in.
7. Because your brother’s friend’s cousin made a killing on it
First, who knows what really happened? This is kind of like believing someone’s fish stories. Second, if it turns out that the person really did make a killing on the stock, chances are high that it’s way too late for you to do the same. You would most likely just be buying high after the price had already gone up.
8. Because that’s where your dart landed on the list of stocks
This is the “a monkey can do it” theory. The thing is, it’s not that monkeys are good at picking stocks. It’s that it’s hard to pick stocks. So don’t buy without doing research and having a well thought-out plan. (Keep in mind, too, that Warren Buffet has said, “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”)
9. Because you don’t want to miss out on the latest trend
By the time the average person hears that “Technology stocks are hot! Financial stocks are way up!” — they’re not. Desperation or fear is never a good basis for any sort of decision. Don’t let them be your guide.