All entrepreneurs know that raising capital is one of the hardest aspects of their activity. The bad news is that investing in not a mathematical thing to do, you can never be certain that a move you make is the correct one. But building an investment portfolio based on a series of does and don’ts will lower your chances of making a poor choice. Next time when you plan a big financial move, peel your eyes for some of the investment red flags below. They’re a tell-tale sign you’re about to make a bad investment decision.
#1. You need to borrow money to buy it
If you have to borrow money for an investment, this means it is a bad investment. We don’t say you must never borrow money or take out a loan to diversify your investment portfolio.
Well-versed investors use what is commonly known as margin to do it. But this is a high-risk move which is better left to high-risk traders. Generally, safer stocks are better and sometimes, even experienced investors choose those instead of borrowing money just to finance their investments. Apart from being a high-risk investment for your particular case, you’ll also end up paying interest on your margin loan so, it’s double the trouble.
#2. Investment advisors push you to buy it
Not everything investment that advisors recommend is a bad investment, but counsellors working on commission are less likely to put your portfolio’s greater good ahead of their own. Before acting based on what your advisor recommends, find out how are they paid.
#3. EVERYBODY else is buying it
When it comes to investments, following the heard is one of the deadliest sins. Remember that general excitement around an investment can artificially inflate its value. Once the excitement disappears, the bubble is very likely to crash, and your investment will plummet. Instead, try to do more research beforehand. Try to learn more about the fundamental principles of it and avoid following the herd.
#4. The buy now or “miss out” principle
Being pushed to “buy it now or miss out” should raise you a huge investment red flag. A good investment will always be a good one, not only today, tomorrow, or the next couple of months. Some of the top Forex trading brokers accepting US clients recommend researching the principles and fundaments behind an investment, otherwise, you risk to be caught in a bubble that will sooner or later pop. Stick to long-term investments. Those will always be good ones.
#5. The price is VERY low
When you guide your investment choices on the “the price can’t go lower than this” principle, you’re very likely to let yourself fooled by this misconception. Falling prices are another tell-tale sign of a stock that will remain at a low level for longer periods.
If buying low-price stocks or currencies is still tickling your interest, try to research the business, political, and economic environment surrounding those beforehand.
#6. Notorious investors are buying it
In Forex, there is a trading method that works like a charm. It’s called copy trading and it lets less experienced traders copy experienced ones’ decisions and moves. This allows them to evolve and build a solid investment portfolio. However, this doesn’t work in all other investments.
If notorious investors buy stocks and equities and you are tempted to copy them, remember that they may have different needs and interests than you. While, in its essence, an investment may be good for some, for you, it might be the end of your investment career.
#7. The stock price is higher than the company performance
When you analyze investment opportunities, and you notice that stock performance exceeds company performance, run like never before.
Why? The simplest explanation is that if a stock rises in price, but it doesn’t bring more earnings to the company, you’re serving yourself a Molotov cocktail. Normally, earnings are those that dictate stock prices. If the company earnings fall behind, run. Instead, try to find an investment with a reasonable price or that are even undervalued.
#8. Long-term investments
When looking into investment opportunities and noticing there is a request for you to hold them for long periods, consider yourself warned. One of the most common examples is the case of variable annuities. If you sell sooner than the pre-established interval, you will face hefty charges that can sometimes go between 5 and 9 percent. While in some cases, long-term investments do have their advantages, it’s better to find investment opportunities that allow you to access your funds whenever you need.
#9. It’s too good to be true
Generally, if an investment looks too good to be true, it probably is. Scammers and salespeople are well-trained in what investors want to hear. Avoid those scams by learning the typical gains and returns of different investments and if someone is luring you with more generous profits, assume it is a scam.
#10. Stock performance is low within its own industry group
Actives that are undervalued within their own industry group should rise you some question marks. Stocks that are undervalued in their peer group are a sign that the company is below the market value. In such cases, it’s better to put your money on industry leaders. This is a much safer approach.
#11. People on the insides are selling
When people on the inside start to sell their stocks, this might mean that the company is in a bad place. In these scenarios, executives find themselves in a need to raise cash and this is the easiest way to do so. But if nobody else on the inside is interested in buying those large chunks of stocks, better stay off.
#12. The investment is unregistered
Unless you are a very experienced and, above anything else, very wealthy investor, you should avoid unregistered investments. These asset classes rarely follow any regulations and laws to shelter investors. Traditional securities are safer.
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