Common Share Trading Traps Beginners Fall Into

Despite the relatively discouraging state of the market lately, there are still many people eager to break into the stock market for the first time. This is not necessarily a bad thing, particularly for those who are making their plans for the long-term and are equipment to rise through the storm. However, beginners in the stock market should be careful not to fall into certain traps. Some of these are truly and intentionally put in their way by unscrupulous brokers and similar parties, and others are really nobody’s “fault,” but a result of the way the market looks to a very inexperienced person.

Going Unlisted

The first common trap is to buy unlisted stocks. Do not buy stocks from a company that is not listed in a source like your daily newspaper or Yahoo!’s stock listings. If you buy unlisted stock, you cannot get protection if the deal somehow goes bad. In any case, if the stock is not listed, how will it drum up the right kind of attention for you to eventually be able to sell it at a good price? Even if you think you have heard of the company, do check a reliable set of listings just to be sure.

Buying Inactive

Secondly, do not buy inactive stocks. Let us now clarify this term. Active stocks may be listed, but their shares have not changed hands in a long time. So, how long is long? How rare is a rare sale? To many authorities, stocks that have not changed hands more than twice in the past month are considered inactive. Now, buying inactive stocks does not have as many legal ramifications as the purchase of unlisted stocks. However, it is still usually a bad business decision. Stocks usually become inactive because the company in question is doing very badly, so nobody wants to buy the shares. You might be tempted to take a chance on shares being sold at rock-bottom prices, but what would be the point, if you are just likely to be stuck with them? One of the best ways to avoid this mistake is to do a great deal of preparation and research work before you actually start buying. Spend some weeks reading up on investing, and spare a few minutes daily looking at stock listings to observe what names keep cropping up, and in what capacity. This preparatory reading will also give you a good “feel” for what normal share prices for different kinds of companies are, so you will learn to be a little more critical if you should encounter something that is suspiciously cheap or expensive.

Buying Closely Held Stocks

Thirdly, avoid shares by companies that are “closely held,” which means that the shares are distributed among 5,000 investors or less. Experienced investors may know how to make money from these relatively volatile companies, but they are not recommended for beginners. This is because such stocks tend to be tough to buy once they become attractive, and difficult to unload when they start to do too badly. Furthermore, closely held companies are more likely to be prey to the machinations of one or a few large investors.

These are not necessarily hard and fast rules. You can still break them and make money. However, if you are just starting out with share trading, be aware that you are taking a huge risk. In fact, even if you are experienced, do keep to the first rule, at least.