All of us want to invest in the Stock Market and make quick profits out of it. Most of the small time investors have limited capital resources and little knowledge of the market. More than often we are driven by our personal sentiments and beliefs. Most retail investors follow the news or some analyst and they want to invest in the market believing the stock will behave the way it has been predicted. What we fail to understand is that the capital markets are immensely complex and requires thorough research and diligence. Most of the Best Stock Brokerages provides you with Research Tools that will help in making safer bets.
To help some of our readers who aren’t well acquainted with the stock market, we have made a list that will help you avoid losing a major chunk of your initial investment.
1. Buying Stocks when they show a declining trend: Most of the retail and inexperienced investors believe and trade in stocks when they show a declining trend. To newbie traders, such stocks appear to be cheap. Although this doesn’t seem to be logically incorrect, but one has to understand that the market can remain irrational for a long period of time. So a declining stock may fall further and stay there for a long period of time before changing its course. This is also known as knife catching and it must be avoided at any cost.
2. Buying Second-Rate stocks with the hope of a huge payout: New investors want to make some quick money when they trade stocks that look cheaper as compared to their competitors. Investors have to realize if a stock’s market cap is lower than its competitor, there is usually a good reason behind it as “the market is always right”. Investing in low P/E ratio companies is a fool’s game. One has to understand that most of the successful companies have a high P/E ratio such as Amazon. Companies with a low P/E ratio offering high dividends generally have a weak capital position and they might get stung in the long run.
3. Adding to Losing Positions: One of the biggest mistakes made by new investors is trying to average down their holdings. When investors see that their shares are falling, they try and buy more quantities of the same share. Again this seems to be logical as they are reducing their average price per share but please realize that it also increases your position size. Predicting the market is just way too difficult if not impossible. The stock may fall further and result in much bigger losses as compared to the situation when you haven’t added more shares to average down. Holding onto losing positions also is not the best approaches as the markets can stay irrational longer than you can stay liquid. It is always advisable to downsize your loss in the initial stages and not invest further into losing positions. One must always place stop loss limits to minimize your losses.
4. Buying a dropping making stock instead of the one that is breaking into new highs: A stock which has fallen always seems more attractive than the one which has reached an all time high. They appear to be cheaper and investors believe that it is time for them to perform better. Stocks which have reached an all time high are expected to fall as new investors believe that is the best they can do. One has to understand that these stocks have a better probability of rising further as those stocks have lot of buyers interested in them. Stocks which have reached an all time low might fall even further and then may take a longer duration of time to come to their previous levels, which might not go well with short term traders.
5. Emotion Driven Trading: This is the most common mistake made by early stage investors. Most people have sentiments attached to some very popular or not so popular brands and they fail to understand that trading is an analytical job. Studies have proved that the decision making of investors are affected by various biases some of which include:
- The mistake of over-estimating oneself
- Making decisions made on whatever little information they have
- Using new information to re-affirm the decision you have previously made
6. Not selling at the right time: Greed is something that results in the maximum number of losses in the stock market. People fail to realize the best time to sell their shares and the opportunity to walk off with a decent amount of profit. They believe a rising share will rise further and when it starts falling, they wait for the prices to rise again. All this ultimately results in converting their profits into losses.
7. Buying stocks based on what others say: One has to undergo a little amount of personal research too before buying into a stock. An investor must never invest money just because he has heard some rumors or based on what analysts have been saying on TV. One must be competent enough to do some research on his own and re-affirming the facts that have been pointed out by those analysts.
8. Failure to learn from their mistakes: This is one of the most important lessons of life which applies to the stock market as well. One has to take every experience as a learning experience. So while your shares are sliding down, it is advised to bail out at the earlier stages rather than waiting for it to rise again, which might not happen for the lets say next 6 months. It is advised to take it as a learning experience. You must analyze what went wrong, what were the market indicators, when the correct time to exit was and what should you do next. People failing to learn and trying to blame their failure on other people or external factors end up blowing up their account.
The points mentioned above can lead to huge amount of losses to early stage investors and more than often they give up on trading. Trading is a good job for a living and can also guarantee you quick returns. But it requires a good knowledge of the financial markets and a lot of preparation. You have to follow the market on a regular basis, learn how to analyze the market on your own and make safe bets based on proper research. One must study regularly and follow some experienced traders and the advice they give.
