Trading in stocks can be a mysteriously attractive proposition for new investors. The lure of short term gains or getting rich quickly is one of the many reasons people take up this activity. In hoping to achieve this goal, they tend to be too eager to jump into it without taking the time to learn from the mistakes of others. The truth is that investing in the stock market is a tricky game – one that requires a lot of effort and patience.
It’s worth bearing in mind that mistakes are inevitable when trading in stocks – the most seasoned investors make mistakes from time to time. However, there are some “rookie mistakes” that can and should be avoided by new investors as they could lead to losses large enough to put them off trading entirely.
This article is a guide to steer clear of making the following five rookie mistakes while trading online so as to avoid losing huge sums of money.
1. Investment Goals
It is important to chart out your plan before you start investing in the stock market. A basic yet solid personal investment plan would cover:
- Your overall objectives (whether long, medium or short term)
- Your appetite for risk, or the amount of money you can afford to lose, and
- The amount of capital you are ready to invest
2. Portfolio not Diverse Enough
New investors often fail to diversify their investments. Investing all your capital in a single sector is a classic case of putting all your eggs in one basket. Distributing your investments across sectors is more likely to protect you from idiosyncratic risks. Also, based on your risk appetite, it might make sense to invest in different types of stocks (long and short term, short cap, large cap and mid cap, etc). This ensures that even if some of your investments don’t work out, you have enough diversity in your portfolio to make up for your losses elsewhere.
3. Obsessing Over Your Portfolio
It can be difficult to fight the temptation to keep checking the swings in your stocks’ prices, but doing this on a regular basis can increase the chances of panic-based trading. Instead, biding your time and making calculated long-term decisions will almost certainly leave you in a better position.
4.Speculation-based Investments / Lack of research
One of the worst mistakes you can make as a new investor is to base your investment decisions on rumours or guesswork. Instead, conducting thorough market research and stock analysis, analysing market trends, and studying patterns in the market are some of the elements required to make sound decisions to maximize gains.
5. Relying on Emotions
There are a lot of biases at play when investing in the stock market. In a volatile market, relying on emotions when choosing a stock, or choosing a stock belonging to a company you love deeply, can be a costly mistake. It is important to identify these biases early on and try to take the emotion out of your decisions, and focus more on using tried-and-tested methods to predict a stock’s future performance.
Conclusion
Stock market trading comes with a fairly steep learning curve. Hence, mistakes are going to be a part of the game and you should not fear making them. However, paying attention to the tips mentioned in this article can eliminate your risk of making some fairly basic errors, thereby putting you in a better position than most other new investors.
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