The stock market is the place of both horror stories and grand success stories. We know of people who have lost everything, including some poor souls who lost their lives on the bourses. However, we also hear the unbelievable success stories of people who started with modest capital but ended up making a fortune in the stock market. These are the stories which often give the wrong impression that stock trading is a career where one can use brains and make millions with zero investments. That is what attracts hordes of investors who dream of making it big in the stock market.
What all these players fail to realize is that most of the traders behind the big success stories had spent years understanding the behavior of markets before they were in a position to take advantage, and they also experienced several losses before they were able to strike it rich. That makes it especially baffling for beginner traders who think that they can replicate the big gainers, but often fall flat on their faces due to many errors that they commit merely due to the lack of experience. Let us see a few of these avoidable mistakes.
Wearing Too Many Hats
There are broadly three ways in which investors make money trading stocks. The first is by taking advantage of the organic growth of the price of the stock over the medium or long term. The second is to ride the daily crests and troughs of a particular stock and benefit from intra-day trading by selling off before the close of trading on the same day and book profits. The third is a passive way where the investor just holds on to the stock for years and rakes in the dividends paid out at regular intervals. A mistake most beginners make is failing to decide which type of investment strategy out of these three they should follow to gain the desired outcome. All three have their pros and cons, but every investor would need to decide which hat they wish to wear, based on investible surplus, risk appetite, and the investment goals, and keep wearing that hat consistently. An investor who is seeking dividends would lose out if he decides to sell off some of his shares when the price goes up a bit because he might book a profit but would get lower dividend payouts.
Becoming Emotionally Attached
A smart investor would give himself a target for both profits and losses and exit as soon as either of them is reached. However, some beginners become unnecessarily attached to a particular stock and try to hold on for too long when it is rising in the hope of further gains, or when it is falling, in the hope of recovery. Say you buy 100 shares of a stock at $20 apiece, and set yourself a book-profit and stop-loss target of 10%. What this means is that as soon as the stock price grows by $2, you sell those 100 shares for $2200 and book a profit of $200 instead of waiting for the stock to rise by another $1, because before it grows, it might fall back again to $20. Similarly, if things go wrong and the stock starts to fall, you should sell as soon as it touches $18. This discipline will help beginner investors balance things out over the long term.
Investing from Savings
There is a reason that the stock markets are also called capital markets. You should only invest from your accumulated capital which you can afford to lose without making a dent in your savings for important events. You should also refrain from using the money you need for running your household on a monthly basis. As mentioned at the beginning of this article, we tend to lionize only the big success stories, but we conveniently ignore the accounts of unimaginable losses that so many investors suffer. It is a given that any investor will surely win some, but he will just as surely lose some. Those losses should not put a dent in the monthly budget of the beginner investor, or eat into his savings.
Following trends blindly
With the stories we hear nowadays of startups with brilliant ideas and humongous funding, it is easy to get led into believing that a particular stock will do well for sure. Every week throws up the name of a ‘sure winner’ which everyone is talking about, but a beginner investor should place his bets on a stock that has some vintage and about which enough information is available. Joining the bandwagon to line up and buy a stock that everyone is raving about, without understanding the industry climate and the company’s financial ratios, in particular, would be very likely to bring bad news for a rookie investor. You can click here to see a few stories of stock fads fizzling out sooner than anyone had imagined.
Putting Inadequate Research
We often marvel at how handsome, or beautiful film actors and actresses look, and we line up to watch their movies and admire them. What we do not know about, or ignore even if we know, is the amount of behind-the-scenes work they put in to get that chiseled body or beautiful skin. Similarly, those who make money on stock markets do so mostly because they have spent hours researching the companies whose stocks they plan to buy. Rookie investors often get taken in by the glamor of big wins on the stock markets but avoid putting in the required study.
If you are a new entrant to the stock market, these are the five bad habits you will never want to fall into, so that you can ride the markets successfully. Disciplined moves can help you reap rich rewards.
Author Bio: Thomas Fisher knows what he is talking about stock markets since he has seen some booms in the stock market and also the bloodbath of 2008. You can click here to read about his fascinating story.