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4 Signs You're About to Invest in the Wrong Stock

By Maurie Backman - Apr 23, 2021 at 5:36AM

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Buying the wrong stocks could result in serious losses. Here's how to know when you're headed for disaster.

Your goal in buying stocks should be to assemble a diverse investment mix that leads to long-term wealth. But if you buy the wrong stocks, you'll only set yourself back on reaching your goals. With that in mind, here are a few warning signs that you may be about to invest in a stock that's not a good fit for you.

1. You haven't done your research

It's sometimes OK to buy a new gadget on a whim. But with stocks, not so much.

Rather, it's important to research each stock you buy to make sure the company behind it is not only financially sound, but also that it has decent growth potential. If you jump on a stock without looking into it at all, you may end up regretting that decision.

Man at laptop holding the sides of his face with sad expression

Image source: Getty Images.

2. You're following media hype

Meme stocks have been popular this year, but many of the companies behind them are rather speculative, which could translate into a poor investment for you. Rather than buy the stocks that everyone keeps talking about and the internet seems to be all over, aim to find solid companies with strong earnings and an established record of managing their cash well.

3. You're acting on emotion instead of logic

If you're a big fan of a certain company's product, you may be inclined to buy its stock. Investing in companies that have business models you understand is a good idea. But that's not the same thing as buying a stock simply because you like or use a specific product.

While you can use your knowledge of a certain product as a starting point, you should also thoroughly research the company in question to make sure it does a good job of preserving cash flow and keeping debt to a manageable level, among other things.

4. You're focusing on price more than value

Many investors are drawn to inexpensive stocks -- including penny stocks -- because they feel that, by virtue of that low price point, they're getting a bargain. But a cheap stock doesn't imply that you're getting a good deal. In fact, think about electronics -- you may like the idea of buying a $300 laptop instead of spending $1,200, but chances are that a $300 purchase won't last nearly as long or offer nearly as much value.

The same holds true for stocks. Though expensive stocks aren't automatically a good deal, stocks are often priced low for a reason. So rather than focus on price alone, you should aim to figure out what sort of value you're getting.

Buying stocks isn't something you should do lightly. As such, make sure to approach your investments methodically. Establish an overall investing strategy and take the time to vet stocks individually to make sure they're a good fit for your portfolio. Going this route could spell the difference between accumulating a lot of wealth in your lifetime and losing money in the stock market -- in the near term, as well as the long run.

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