Learning From Others' Mistakes
Learning From Others' Mistakes Part 1
Learning From Others' Mistakes Part 2
Learning From Others' Mistakes Part 3
Learning From Others' Mistakes Part 4
Learning From Others' Mistakes Part 5
Learning From Others' Mistakes Part 6
Learning From Others' Mistakes Part 7
Mistake #1: Using Too Much Margin
Margin is the use of borrowed money to purchase securities. Margin can help you make more money; however, it can also exaggerate your loses - a definite downside. (To learn more about what margin is and how it works, we highly recommend the tutorial Margin Trading.) The absolute worst thing you can do as a new investor is become carried away with what seems like free money - if you use margin and your investment doesn't go your way, you end up with a large debt obligation for nothing. Ask yourself if you would buy stocks with your credit card. Of course you wouldn't. Using margin excessively is essentially the same thing (albeit likely at a lower interest rate).
Additionally, using margin requires you to monitor your positions much more closely because of the exaggerated gains and loses that accompany small movements in price. If you don't have the time or knowledge to keep a close eye on and make decisions about your positions and the positions drop, your brokerage firm will sell your stock to recover any losses you have accrued.
Lesson #1: As a new investor, use margin sparingly, if at all. Use it only if you understand all its aspects and dangers. It can force you to sell all your positions at the bottom, the point at which you should be in the market for the big turnaround.
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