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Stock market investing is such a popular method to build wealth for one simple reason: it works. However, there are a number of pitfalls that can severely reduce returns or even result in a loss. Here are five that are best avoided by anyone planning to start buying shares.
Chasing hype stocks
The first rookie mistake to avoid is chasing hyped-up shares. Personally, any talk of a stock “going to the moon” is a red flag for me! One that springs to mind is Trump Media & Technology Group. This is the firm behind President Donald Trump’s social media platform, Truth Social.
The stock’s up 38.5% over two years, but down 72% since March 2024. This volatility’s unsurprising, given that the company has minimal revenue and is posting losses. The firm’s going to start stockpiling Bitcoin, which might work out well. But if I was starting to buy shares in July, I’d avoid meme stocks like Trump Media.
Ignoring fees
Next is ignoring fees, which can really eat into returns over time. One way to avoid this is to minimise portfolio churn (lots of buying and selling). Investing in stocks for the long term reduces the need to trade in and out of positions.
Going all-in
Another rookie mistake is betting the farm on a single stock. While there’s a chance this might pay off, it’s also very risky, and can result in permanent losses.
The smart thing to do is to build a diversified portfolio of stocks from different sectors. Mine is made up of UK dividend shares and US growth stocks, as well as a handful of exchange-traded funds (ETFs) and investment trusts.
Ignoring valuation
A very common rookie mistake is to ignore valuation. Buying great companies is just one side of the equation — the other’s not massively overpaying for them.
For example, it’s clear to me that Palantir‘s a world-class software company. It’s growing very rapidly as it helps organisations imbed artificial intelligence (AI) into their operations. It’s an ambitious firm led by smart founders, with a seemingly long runway of growth ahead.
However, the stock’s trading at 104 times sales. I think this sky-high valuation’s very risky, especially if Palantir’s growth decelerates.
Not searching for a moat
Finally, many newbie investors fail to assess whether a company has an economic moat. In other words, a durable competitive advantage that keeps competitors at bay.
One firm that certainly has a deep moat is Amazon (NASDAQ: AMZN). It has a massive logistics network that very few can match, while its Prime subscription service keeps hundreds of millions of customers loyal to the app.
It does me. Those familiar brown boxes are a regular sight coming up my driveway!
Beyond e-commerce, Amazon also has a dominant position in cloud computing via its AWS division. In Q1, net sales increased 9% to $155.7bn, with AWS contributing $29.3bn of that (17% year-on-year growth).
The main near-term risk here is an economic downturn in the US, not helped by President Trump’s tariffs. This could see consumers pull back on spending.
However, Amazon’s long-term growth outlook remains strong, with revenue tipped to reach $1trn by 2030! The stock isn’t trading at a crazy valuation, making it worth considering, in my opinion.
