Truthfully, investing in the stock market is the best method to make your money work for you. However, if you are new to the industry, the thoughts of going home with a fat wallet can lead to drastic mistakes. When you are a beginner, it’s almost inevitable to not get into trouble.
Therefore, you have to be aware of these common mistakes before you jump into investing in the stock market. The usual pitfalls that beginners investors face will be given to you in this article. And an idea of how this can be avoided will be discussed too.
Doing less/shallow research on the stock market
The first mistake that beginners make is not doing enough research on the stock market. You must understand what you are getting yourself into before you begin to put in your hard-earned money. It’s worthy of note that investing in the stock market is not the same as buying your shoes in the mall. It requires dedication and research on your part.
You shouldn’t jump into the first stock you see and hope for the best. Neither should you buy because your neighbor said it was a good investment. You should start learning and teaching yourself about the stock market. This can be done by reading financial articles, watching videos, and signing up for established newsletters that offer useful insights.
The best part about doing your research on the stock market is that the more you know, the fewer irrational decisions you’ll make. The kind of things you look into could be the company’s background, past and present performance, leadership, etc. All of the research will help you analyze risks by yourself.
Choosing the wrong strategy
People think of the stock market as people dressed up in suits, crammed in an office space, making calls, and watching numbers dial-up and down on the screen. What they are thinking about here is often the New York Stock Exchange, the one that Hollywood loves to feature. The goodness is that you do not have to be in this building, dressing, and behaving like them to invest. You can still start investing because it’s not difficult to understand.
Without much ranting, what you need to understand in the stock market is the difference between long-term investing and short-term trading. Sometimes, investing and trading are used interchangeably, but, they are not the same.
Trading involves buying and selling your stock within a short period, in a bit to make profits from small price changes, or market volatility. Whereas, investing is all about purchasing shares in a company for the long term. This means holding the stock for a long time with the vision for growth instead of short-term goals.
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Trading is often unstable because of the high risk involved, what you are having in the morning, might change right into the hot afternoon. Albeit, most day traders always lose money, therefore consider the long-term investment in the stock market. You’ll be building a fortune in a lifetime with less risk.
Paying too much in commission
Brokers charge fees for the various trading they do, and they are of different kinds, each one offering its price structure. Many of the brokers do give free structure but you have to be mindful of a lot of things.
Setting Less Realistic Expectations
Now setting realistic expectations is one of the mistakes beginners make in the stock market. The stock market will be a fun place for you to learn and earn, but you have to set realistic expectations. The expectations you set before you start are important, knowing fully well that slow and steady wins the race. You should invest money you wouldn’t need in the next five years or more.
Expecting around profit in the stock market is setting yourself up to be disappointed. There are lots of companies that have great records and stable choices, and you should understand that you are investing in the future of that company. It’s not out of place to find a new competitor coming up to shake things up. Which amplifies the logic that past performance does not guarantee future results.
This doesn’t mean you wouldn’t find a good stock to invest in, it only means, you should be rational with your expectations instead of basing it on someone else’s experience.
Not understanding the company first
Recently, people got excited about the game stock because they thought it was a surefire for an investment. It’s not the first or the last time people will be tempted to act based on emotions especially due to the fear of missing out in the stock market.
A lot of people invest in companies just because they are presently hotcakes without understanding the fundamentals of the company. This greeed factor is the reason many investment novices get into financial ruins and disasters. Therefore, before you invest in a certain company, understand their business model
Falling in love with the company
The most innocent statement that people make that will bring financial disaster in the stock market is, “we are investing in the company we love”. Investing too much money in one company is bad for us because, at some point, you’ll ignore the red signs of getting out when it is safe. When the fundamentals of the company are changing or being compromised, then, it should be time to get out. Falling in love with the company would make you resistant to these changes. To be able to avoid these scenarios, you should have a game plan on how to enter your position and how to exit.
Buying based on an expert recommendation
Of course, the expert is the people we turn to for advice because they are professional and they have experience in the areas we are interested in. In the stock market, experts are making predictions, using previous knowledge. Since no one can predict the future, take any expert advice with a grain of salt.
All the More, it’s crucial to have an independent thought process when it comes to why you are investing in a certain stock. It’s worth mentioning that experts may also be buyers depending on the position they hold themselves. It’s not common to find an expert promoting a stock they don’t own.
Not Diversifying your portfolio
It’s simple, do not put all your eggs in one basket, no matter how tempting it can be. Doing this increases the risk of your investment portfolio. Having your investment spread out over many different companies, minimizes risk and helps you achieve sustainable results. An index fund is a perfect example of this balance.
Congratulations, now, you are hopefully more equipped for investing in the stock market. You know the various pitfalls to avoid, let’s get the ball rolling.