Finance

7 types of stocks that you should avoid investing in

The stock market is a great place to make investments and appreciate your wealth. However, it requires proper research, patience, and trading skills to make money. Besides knowing where to invest, it is equally important to know the companies and sectors not to invest in stocks to keep your money protected.

Following are the types of stocks that you should avoid putting in your money:

  • Business models which you don’t understand

It is wise to avoid companies with business models you do not understand. Or those companies whose business model is vague. Without this understanding, it would be difficult to study their fundamentals and anticipate their future performance.

  • Small and new companies

Avoid investing in recently launched companies that feature small market capitalisation as they often tend to be highly volatile. This is because they do not have the resources that large-cap companies have and are more vulnerable to negative events like decreasing demand for goods and services during a period of economic contraction.

  • Companies with high employee turnover

You should also not consider investing in companies with high employee turnovers, as it is often a sign of poor management and unfavourable business prospects.

  • Falling knife stocks

‘Falling knife’ is the term used to refer to stock market that are seeing a sharp continuous drop in their price. Investors often perceive these stocks as good opportunities to buy the shares at lower prices and sell them later at higher values. However, that is not true in most cases. If a company is constantly losing its value, it’s probably a signal that something is significantly wrong.

  • Debt-ridden firms 

Another category of companies which you should avoid is companies that are deep in debt. Their debt represents the fact that they are not generating enough revenue and are required to meet their expenses by borrowing money from outside. You should take this as a red flag.

Companies with low trade volume 

The stocks of companies that are not traded actively by investors should be avoided as they are not very liquid. That is, it is difficult to sell them as there are very few people wanting to buy them. This generally happens when the company is not very sound financially, and thus its prices are dipping on a regular basis.

  • Opaque firms

You might sometimes come across companies that have not made information about them available to the public. These firms maintain relatively low visibility and are often quick to exit the market. It is comparatively easy to identify such stocks as very limited information about them is available for research, which should be taken as a warning sign by you.

Conclusion

Not incurring a loss is also a form of profit. Thus, always invest your money wisely and in a prudent fashion to keep your portfolio green. You can also consult a financial advisor for expert advice on stocks to buy today and plan your investments judiciously.

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