Trading stocks can be a hugely profitable business if you do it correctly. Unfortunately, too many people fall into the same traps over and over again, lose money, and become disheartened with the entire process. Luckily, tried and tested techniques can allow you to buy the right stocks and ideally enable your portfolio to grow over time.
Not Conducting Any Research
The first and perhaps most heinous mistake is going into the market with no prior knowledge and no attempt to gain the knowledge needed to become successful. This is a mistake that all rookie traders fall into when they first begin because it seems so simple. Buy low, sell high. All you need to do is see what is cheap, wait for it to rise, and then sell for a profit. Well, no. Obviously, you want to sell high and make money, but there is so much more to trading stocks that if that is your only strategy, you are destined to fail and fail badly. Best shares to buy are when you have done extensive research and understand a bit about what the company does. For example, you might buy an established stock like a banking company at a higher price, not because you will sell, but because you want to create an income from the dividends offered. On the other hand, you might ignore an upcoming IPO of a tech company because although it looks like you will profit handsomely, your research has indicated it might turn out like the Facebook fiasco where many people lost three shirts. The critical point is to ensure you understand what you are getting into before jumping in.
Not Learning The Lingo
Not understanding the language used in trading won’t necessarily mean that you lose money, but it will undoubtedly help you understand the market’s nuances. Some of the more common terms include:
- Annual Report: Publicly listed companies must submit a yearly report about the state of their organization to their shareholders. This is available to the public, and you can gain a lot of helpful information by reading it.
- Bear Market: This occurs when the entire market is in a downward trend. Most stock prices are falling.
- Bull Market: Opposite of a bear market, when stock prices rally over a more extended period.
- Blue Chip Stocks: These are considered to be safe bets that offer high-yield dividend payments.
- Broker: This is the person or company that executes your buy or sell orders.
- Dividend: These are a portion of the earnings that a company makes. Typically, paid quarterly or yearly. Companies can sometimes suspend dividend payments in times of fiscal stress.
- Initial Public Offering (IPO): This happens when a company wants to raise a lot of cash to fund its business and goes from a privately owned company to a public one. Any member of the public will be allowed to purchase shares.
- Pink Sheet Stocks: AKA penny stocks. These are typically stocks that are worth under $5 and are sold by smaller companies. They are worth a punt sometimes, but you should stay clear of them if you are a beginner.
- Rally: When the market rapidly increases or decreases in value, this is known as a rally. You can have a bull rally or a bear one; the point is that it happens very quickly and over a more extensive range of shares.
- Short Selling: Strictly for the pros only. This is when you want to bet against the longevity of a particular company. Shorting is risky, and you could lose out and if you have dreams of making your fortunes à la Michael Burry, just remember that he is a savant!
- Volatility: You can make big profits or lose big money by trading on volatility. It is essential when the stock price of a company is fluctuating wildly.
There are many more terms that you should go out and learn yourself, but these should get you started.
Not Investing Consistently
Any venture in life, especially trading, requires consistency to succeed. If you are only dropping a few hundred dollars here and there once in a while, you will never get the actual gains that can change your life. The best option is only to invest what you can afford to lose; that is the common consensus. However, beyond that, you should think about a percentage you can invest from your paycheck each month. A good rule of thumb is around 10-15%. So if you are earning $1000 per month, you should aim to invest about $100-$150 per month into well0resaerched stocks. If you cannot afford this, invest a percentage that you can afford; even 1% is acceptable. The key is to be consistent and build up a portfolio over a long period.
Not Focusing On The Long Term
The stock market is a long-term endeavor. It is undoubtedly true that you can get rich by day trading, but that is reserved for those experienced few who have been doing this for years. Furthermore, those who day trade and make the big bucks will reinvest into long-term investments to hedge against any day trading mishaps. Additionally, it would be best to create an extra income from dividend payments that build up and compound over time. Those who think long-term prosper, while those who think short lose more often than not.
You never put all of your eggs in one basket. That’s obvious to anyone who’s dropped a basket of eggs before. It is the same in business and trading in particular. No matter how well a company is doing, you should never invest all of your money into one stock. It doesn’t matter if it pays out $1 per share in dividends; you should always ensure to create a diverse portfolio that allows you to hedge your bets across a range of stocks. Another upside of diversifying, especially for beginners, is that you will end up researching more of the market in your quest to find new stocks. This will teach you a lot more than if you only bought one stock.
Trading stocks isn’t as difficult as it first seems. You set up an account with a brokerage firm, do your research, and then invest a consistent amount of money each month. To make the right decision, you need to do your research, think about the future, and don’t allow your heart to override your brain.