First Person: The 5 Worst Reasons to Buy a Stock

I have always been troubled by the reasons many investors give for why they decided to purchase a certain stock. There is no doubt the stock market is a powerful way to make money over the long run, but some "investors" come up with terrible reasons to get into a stock. Some would say it is the media's fault, and I don't completely disagree, but at the same time I do believe every investor should hold themselves accountable for each transaction they make. Let's take a look at the five worst reasons to buy a stock.

The price is low - It is a total misnomer that a low actual price of a stock is a good reason to buy. In reality it is only the relative value of a stock that matters, not the actual price at which the stock trades. For example, many amateur investors believe a stock is much better buy if it trades at $2.50 instead of $95 per share. After you do your research you'll often find that a stock trading at $2.50 is at that low price for a reason, and the stock at $95 per share is a better relative value. Look much deeper than the price of a stock when searching for investment ideas.

The stock price is so low that it can't keep going down - I believe it is a good idea to look for value in the stock market, but a statement like this one will really get you in trouble. Relying on forward looking earnings estimates or historical price trends can make you think the stock can't go any lower, but this is simply not the case. During the credit crisis many learned this lesson the hard way.

An expert recommended the stock - I'm all for watching informative financial television shows to learn about the market, but never buy a stock based on one person's recommendation. I firmly believe you should always do the research yourself before making the purchase. Television commentators are primarily looking for high ratings, while you are looking to make wise investment decisions.

The stock has momentum - I'm simply not a fan of momentum investing. I believe that the vast majority of those who try to jump onto a stock that has momentum will end up hurting their portfolio in the long run. In today's stock market momentum can come and go in the blink of an eye.

Fastest way to earn money - The stock market should never be used as a bank account. Those who are looking for a fast way to earn money should look elsewhere. While there is always the chance you could gain a lot of money in a short period of time, you also put your entire investment at risk. If you need the money in a short period of time, stick with an investment where you can guarantee you'll get back the initial capital you invested.

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