Five Key Questions to Ask Before You Buy a Stock

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Your finger hovers over the “enter” key – the computer screen’s glow flickers as the price of the stock or fund you’ve teed up to buy jitters up and down.

Your adrenaline and pulse rate are up, your pupils dilated – the price dips and, boom, you take the plunge.

Well before you hit “enter” and trigger this cascade of chemical excitement and release, you should have asked yourself some key questions to make sure you weren’t tripped up by common behavioral investing mistakes.

The pitfalls are many. There are nearly 200 different cognitive decision-making errors you can fall prey to – particularly when committing capital to your “brilliant” new investment idea.

But many errors are just variations on a theme. For a start, learn to avoid the most common and damaging errors by considering these five key questions before you hit “enter”:

  1. Overconfidence – How much do I know about this company/industry/situation/strategy?

Maybe you got an idea from a Jim Cramer Lightning Round comment, Reddit chat group, or a product you saw in a store. Maybe you had a successful idea in this industry/sector before. You followed up with a little research or you’re going with your gut because this sounds like something you seen before.

  • Do you know enough about the dynamics of the company or industry niche?
  • Can you easily explain to someone else the mechanism or catalyst that has to happen for your investment to pay off?

You don’t have to be a small-cap, Japanese value stock analyst or consumer products expert to invest in those respective areas. But you do need to know enough to support the logic of your thesis and have a realistic idea of the limit of your knowledge. Otherwise, overconfidence in your own ability to judge incomplete or uncertain information can kill you.