Most investors approach investing thinking about how much money they can make and which stocks they should buy to get rich quick. A more conservative approach begins with assessing which stocks should be avoided and how to minimise the chances of losing your hard earned dollars!
It's very easy to lose money in the stock market. Here are some of the types of stocks you should probably avoid.
Stay within your circle of confidence.
Acrux Limited (ASX: ACR) and Pharmaxis Ltd. (ASX: PXS) – if you aren't clued up about the science, regulations and competing laboratories across the globe working on other forms of breakthrough medicines then biotechnology is a sector to be avoided. Acrux and Pharmaxis have lost 72% and 61% respectively in the past 12 months.
Balance Sheet Weakness
Stocks such as Billabong International Limited (ASX: BBG) and Elders Ltd (ASX: ELD) have suffered from weak balance sheets which have led to sustained losses for shareholders and a lack of dividends. Often investors in these types of companies are faced with dilutive capital raisings too. With so many companies available with strong balance sheets, there is no need to play cat-and-mouse with risky debt-laden stocks.
High Cost Gold Miners
During the recent commodity boom, mining stocks left, right, and centre were riding high and their share prices were flying. That situation is now firmly in the past and investors shouldn't be expecting a return to boom times any time soon. Small gold mining firms such as Kingsgate Consolidated Limited (ASX: KCN) and Silver Lake Resources Limited. (ASX: SLR) are both trading near their 52-week lows, but as long as the gold price remains depressed these businesses will struggle to increase their profits.
Better alternatives are available
While some investors might consider blue chip stocks such as Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW) boring, both companies offer non-discretionary services and command major domestic market shares. These two companies continue to grow their profits and dividends to shareholders – exactly the things you want from your companies.
