It's possible to make a fortune investing in the stock market, even if you don't have much money to invest. Without a strategy, however, it's just as easy to lose everything.
You don't need to know all the ins and outs of the stock market to start investing, but it is wise to understand the basics. If you want to earn as much as possible from stocks, start by avoiding these common mistakes.
Mistake No. 1: Investing all your money in a single stock
It's easy to get caught up thinking about what could happen if you were to invest all your money into a single stock that skyrockets in value. What if you had put your life savings in Amazon back in 1997? What if you had invested in Tesla five years ago?
However, hindsight is 20/20, and it can be difficult to predict which companies will succeed and which will fail. Take Theranos, for example. The health technology start-up was considered a breakthrough company that would revolutionize the blood-testing industry, resulting in a $10 billion valuation. However, its executives were later charged with fraud after it was revealed that the company's blood-testing claims were false. Shortly after, the company was shut down.
While fraudulent companies like Theranos are relatively rare, it's proof that no matter how promising a company looks, you never know exactly how it will fare in the long run. If you bet all your savings on a single stock and it fails, you could lose a lot of money.
How to invest instead: Rather than putting all your money behind a single stock, aim to diversify your investments. If you're investing in individual stocks, try to invest in at least 10 to 15 different stocks across various industries. This way, if one or two of the companies don't perform well, it won't tank your entire portfolio.
Mistake No. 2: Trying to get rich quick
While some people are able to get rich overnight with the stock market, these tactics are extremely risky -- and most people end up losing more than they gain.
To get rich quickly with the stock market, you'll need to bet a lot of money on risky companies. Most financially healthy companies experience relatively slow but steady growth. Volatile ones, on the other hand, often see wild ups and downs. If you're lucky, you could see substantial returns. But you could also experience devastating losses.
How to invest instead: Although it requires more patience, a better approach to investing involves focusing on the long term. Invest in strong companies that have a solid track record of success. These companies may not experience explosive growth, but they're much less likely to crash and burn than their more volatile counterparts.
Mistake No. 3: Going with your gut when choosing stocks
When you're picking stocks, it can be tempting to choose investments based on your personal interests. You may choose to invest in your favorite restaurant, for example, or a certain retail store simply because you enjoy shopping there.
While it's not a bad idea to invest in companies you're familiar with, there are many factors to consider when choosing stocks. Your favorite restaurant may serve delicious food, but if it's struggling financially, it may not be the best investment.
How to invest instead: Before you invest in any stock, do plenty of research so that you have numbers to back up your investing decisions. Look at factors like the company's sales records, whether it has been consistently innovating to keep up with the competition, and what its management team looks like. Also, be sure to consider the industry as a whole. If the company itself is thriving but it's part of a dying industry, that could be a red flag.
Investing in the stock market can be a great way to build wealth, and with the right strategy, you can get rich over time. By avoiding these investing pitfalls, you can make the most of your money.