Stock market investing has had made many small investors a millionaire in a short time, but the lure of making big profits has also bankrupted others. The gains or losses are the part of the game. However, losing money only due to small mistakes puts a lot of physiological and financial pressure on investors.
The majority of new investors generally like to buy and hold stocks for much shorter periods compared to traditional investors with big investments. These investors frequently make small mistakes that can quickly eliminate their investing capital.
Fortunately, the good news is that new investors can easily avoid these mistakes only by identifying them and taking steps to stop the bleeding. In this article, we have identified five common mistakes that the majority of investors can easily avoid.
Buying Shares of Unfamiliar Company
Experts always suggest investor’s play where they are best. If you have a better understanding of the energy sector, it is best for you to play with energy-related stocks instead of buying tech or internet stocks. Only make investments in companies that you know well. When you have a better understanding about the company’s growth prospects and its industry dynamics, you have a naturally built-in advantage to correctly predict the potential price movements.
Following The Market Speculations
New investors often fall into the trap just by following speculations. In addition, buying stocks on media reports isn’t a good investment strategy. This is because media covers only those hot stocks that had already reached their peak and had already double or triple their stock price. Bitcoin is the perfect case in this scenario. Bitcoin price increased almost $15000 in final two months of 2017 amid speculation that it is turning into a million dollar coin in future.
Unfortunately, by the time that the media got involved with a story about rising bitcoin, the coin had already peaked and the investment is overvalued by that point. Bitcoin price, however, declined close to 80% in fiscal 2018, resulting in big losses for investors who had bought the coin based on speculations and media hype.
You must have a well-defined trading plan for each trade. You must know exactly about the entry and exit points; you also must know about the amount of capital you can afford on each trade and the utmost loss you can take. You must place a stop loss order on each trade as this would help in reducing losses. The trading plan should also include the technical and fundamental aspects of the stock.
You must do extensive homework before making any position. This means that you must learn about the business model of the company. This is important because stock prices are significantly responsive to financial reports, seasonal headwinds, and historical trading patterns. In addition, investors should also research the financial position of the company along with other metrics such as dividends and shares buybacks. Business strategies and efficient management also play a key role in share price movements.