Last Updated on Dec 20, 2019 by James W
You can’t be expected to become an investment expert overnight and even the most successful investors have all made trading mistakes that they have had to learn from.
If you are thinking about trying to accumulate some wealth by playing the stock market it would probably save you time and money if you can avoid some of the classic rookie errors that so many inexperienced investors make.
Here are some of the regular mistakes and mishaps that you can try to avoid when you invest in stocks, including a look at how to get started, why your emotions play a key part, and how to take steps to avoid heavy losses.
Stick to what you know
There are some very complicated financial trading instruments and markets that you can gain access to when you decide to invest in stocks but a word of caution, it normally pays to only invest in something you understand.
You can click here to get a better idea of certain strategies and trading ideas and it is always a good idea to familiarize yourself with what you are getting involved with before putting any of your cash down.
Another good example of sticking to what you know would be when you concentrate a particular sector or industry that you know something about. For instance, if you work in the oil industry you will probably have some insights about trading conditions that could help you make a more informed investment decision.
Spread the risk
There are plenty of us who can get excited about a specific company or hot stock that you think is going to soar in value in the near future and the temptation is to go big and concentrate on investing in that one opportunity.
Just like a casino scenario, if you bet all your money on red and it comes up black, you have lost all your money in one spin of the wheel.
No matter how solid you think a stock opportunity is it is always wise to spread the risk and only expose a certain percentage of your money on one stock so that you live to fight another day if it does go wrong.
Be prepared to play the long game
Patience is definitely a virtue when it comes to stock market investing and it is far better to take a long term view of your investment picks rather than trying to make a quick buck.
Slow and steady normally wins the race and it’s best to have realistic and modest expectations in the shorter term.
Regular investment plays can eat into your profits
You have to pay a commission every time you buy and sell stocks and all of those fees can have a detrimental impact on your profitability.
Too much investment turnover can definitely make it harder to achieve a profit and it is often far better to hold onto stocks for a little while if you can as this allows you to absorb the commission costs if the stock value rises over time.
Getting the timing right
A classic investment conundrum that even experienced investors struggle with is getting the timing of your investments just right.
In an ideal world, you would buy a stock at its lowest price just before it soars in value and earns you a tidy profit. Obviously, investing is rarely as easy as that and you have to accept that it is hard to achieve perfection.
One strategy that helps smooth out those wrinkles is an approach known as “dollar cost averaging”. This involves buying a stock at regular intervals at different price levels, allowing you the chance to achieve a steady return overall rather than fretting about getting the timing right for one single stock purchase.
Set a stop loss
It is inevitable that you will suffer a few losses where a stock underperforms and become worth less than the amount you paid for them.
A classic mistake here is when you hold on to that stock in the hope that it recovers your losses.
That might happen, but savvy investors know when to cut their losses and set a target for buying and selling their stocks if they hit these points.
This ensures they minimize their losses and lock in profits.
You need to diversify
If you were to analyze the portfolio of a successful investor it is highly likely that they would be holding stocks and investments across a range of different sectors and opportunities.
It is generally considered that you should try and allocate a maximum of 10% of your available capital to any one investment.
Keep a lid on your emotions
It is never a wise idea to let your emotions take control of your investment strategy.
Try and keep a calm head and avoid getting too excited when a stock is racing upward in value or too fearful when things are not going so well.
Bull and bear markets conditions are fueled by greed and fear and plenty of smart investors love it when there is a sense of panic, as this can create buying opportunities for those who can keep a lid on your emotions.
Never invest more than you can afford to lose
You need to be comfortable with the level of exposure that you have to the stock market and this means that you should only play with money that you could afford to lose in a worst-case scenario.
If you have too much money staked it can also cloud your judgment if you are anxious about your level of exposure and what could happen if your investment plunged in value.
It is normally considered a good strategy to build up your exposure over a period of time and that is the way many successful investors manage to accumulate their wealth.
If you can learn from the mistakes of other investors and avoid falling into the same traps, that would be a good starting point for your stock market adventure.
