One of the mistakes many small investors make is buying unknown small-cap stocks based on tips via SMS or advice from friends of friends who have ‘inside information’.
When they realise that a stock is a lemon and rapidly losing ground, they compound their original mistake by buying more in an effort to ‘average’ down the original cost.
Eventually the stock becomes unsaleable because there are no buyers left, or the stock gets delisted.
There are two ways to avoid such mistakes. The safer way is to buy only well-known large-cap stocks (though there are no guarantees that such stocks won’t go down after buying them).
The smarter way is to do a proper fundamental and technical analysis of the company before you buy its stock.
In a recent article in investopedia.com, 8 signs of a doomed stock have been listed. The list can be used as a guideline for the kind of stocks you should avoid buying.
You can read the article at this link.