As someone who has worked in finance for quite some time, I fully believe in the power of the stock market to build financial wealth. In order for the stock market to work for you, you must invest wisely. I have found that many people flood into the stock market for all the wrong reasons, and without doing their homework. There are definitely some solid reasons to buy a stock, but often I find that the average investor uses poor excuses for why they want to purchase a stock. Let’s take a look at four bad reasons to buy a stock.
Four Popular, But Bad Reasons to Buy a Stock
1. A television financial expert said it was a good stock- I cannot possible overstate the point that I believe this is a terrible reason to buy a stock. I’m not saying you should never pay attention to what wise minds on the street believe you should be doing in the market, but using it as a sole reason to buy a stock can cause real problems. Remember, these people on television are primarily out for good ratings, while you are looking to build your financial wealth.
2. The stock is down so much that it can’t possibly go any lower- I have heard this one a thousand times, and I have seen it burn people constantly. Just because a stock has lost 60% or 70% of its value does not mean it is now a good value. During the tech bubble there were many people saying that some technology stocks were screaming buys because they were down 70%. In the end, these stocks often either went down 100% and filed bankruptcy, or they still sit 90% or more below their highest level.
3. The stock is priced low, so more shares can be bought- When you are purchasing stocks, the price of a stock means nothing. Do not simply go and look for stocks under $10 per share and assume you are finding a great deal. In fact, often the opposite is true. Many times, stocks that are trading at such a low price are there for a reason, while solid and reliable stocks trade at a much higher price.
4. It is the fastest way to earn money- I consistently hear people say things like “I need some fast cash, so I’ll buy a stock and then sell it in a month or two when I need the money.” If you are in need of a quick way to earn money, the stock market likely isn’t the right place for you. This is not investing, but rather it is simply speculating and taking a huge risk. While that stock might gain you a lot in a short period of time, you could lose almost everything you have too.
Everyone has their own reasons for buying a stock, but I strongly suggest you think twice before pulling the trigger if one of the above is your reason for purchasing the stock.