Everyone makes mistakes, but the important thing for us is to learn from them. Today I am going to go through some of the mistakes that beginner investors make at some point.
Table Of Contents
- 1. Panic Selling
- 2. Panic Buying
- 3. Rushing In
- 4. Over Trading
- 5. Getting Into Risky Speculative Plays
- 6. Not Having a Strategy
- 7. Choosing Expensive Brokers
- Conclusion
1. Panic Selling
If you are investing in the stock market you are probably going to see at least one 50% drop in your portfolio, it is just how the market works. Over time the market is going to go higher sooner or later and you are going to see the returns on your investments.
In order to see those returns the trick is that you need to leave your portfolio and not rush into impulsive decisions. Yes I am talking about panicking and selling your positions when you see that everything is going down.
Usually stocks don’t go down for no reason and when the market is falling the narrative is pretty bad. You are going to listen to various headlines and different people talking how the sky is falling and everything is falling apart. That is why it can get a bit hard to stay focused and just leave your portfolio alone.
Also at those times there is a lot of fear and fear is not a good friend to investors. You need to learn to leave your emotions out of the stock market. A thing I do is I just very rarely listen to the news, especially the mainstream ones on national TV etc.
The less influence you have around you for the stock market the better. The best decisions you can take are the ones that you really believe in and not the ones that you heard from somewhere.
If there is one takeaway from this is that you should never sell something based on fear. If you want to sell a stock because you don’t believe in it anymore of course that is your choice, but don’t sell something because of the narrative around you.
2. Panic Buying
If the panic selling is based on fear the panic buying is based on greed. That happens when you see a stock go higher and higher day after day and you just want a piece of that pie. Usually when a stock starts going up like crazy is when the narrative is very good around it. It is in all the headlines, people are talking about it left and right and is considered ”the next big thing”.
The things in common with the panic selling is that both of them are done based on other people’s opinions. You hear everyone talking about something, you see it going up day after day and then you impulsively buy into it, usually at a very lofty price. The best example of this is the cryptocurrency mania a year ago.
At the top of the boom everyone was talking about it, it was full of speculators and most of the people had no idea what they are doing. They were just buying it because it was going up in price- all the greed kicking in.
That is a recipe for disaster because when it starts going down you don’t know what to do because you just bought it emotionally. You didn’t have much of a plan except for that you wanted to make a lot of money.
I can even give you an example of how I got greedy and bought a stock based on emotion and narrative. It was Micron almost at the near top last year. Back then the stock was going up day after day and everyone was saying how it is going to double and triple this year and I didn’t want to miss out.
Well first it didn’t double, in fact it went down 50% from its highs. But that is not the important part- the important is that once it was down around 25% I just had no idea what to do with it, because I didn’t buy it after my own research, but after listening to people’s opinions.
That is why I decided to sell the stock at around 15% loss. It was better for me to get out and just not get involved with it and I am glad I did. I learned after this to only buy companies after my own research and not let the greed get into my decisions.
And let’s get one thing straight- Micron is definetely a great company with great long- term prospects and there is nothing wrong with owning it, no matter your entry point. The part you want to look out for is buying into something without a clear idea why you are doing it.
If there is a key takeaway from this point it is that you should not make any decisions based on greed. Make your own research and know why you are buying into something. That way you are way more comfortable owning it and even buying more in a downturn.
3. Rushing In
A mistake I see a lot of people do in the stock market is that they just go and start blindly throwing money in it. They start learning stuff later, when they have already lost quite a bit. There is a lot to learn in the stock market and dipping your toes is definetely a good way to start. But first you don’t want to put all your money in straight away and you want to at least know some basic stuff before you start. Maybe even trade with play money for a while until you get the hang of it.
If you want to start learning more about the stock market I have some Articles you can read. Here are also some Books I recommend reading.
Also it is a good idea to start your investing journey with ETFs or funds/trusts. They have much less risk and you get instant diversification. In fact I didn’t buy my first individual stock until after my first year in the stock market.
If there is one takeaway from this is that investing is a long-term game and you are not going to miss out on anything if you spend the first couple of months focusing on learning rather than trading in and out of stocks.
4. Over Trading
This is probably the most common mistake that most beginners make once they get into the stock market. What I mean by over trading is exiting and opening new positions way too much. The ideal thing is to find a good company or an ETF and hold it forever with buying more on a downturn. Of course that is easier said than done, especially when you don’t have much experience.
That is because once they start people get excited and want to try out different stocks and don’t have a lot of patience, which is normal. In this case trading with play money for a while is not a bad idea to get used to the stock market.
Also try not to check your portfolio and all the news every day or even every week. I used to do this all the time and it is easy to get your mind out of the whole long-term thing that way. Now I try not to think that much for my portfolio every day.
5. Getting Into Risky Speculative Plays
I am talking about things like penny stocks, cryptocurrency, weed stocks etc. Maybe there is a tiny % of people that actually know what they are doing there, but the majority of people are better off without it. Yes it can be very tempting to achieve a 1000% return in a couple of months, but it is not tempting to lose all your money. That can happen again because of greed- because you don’t want to miss out on those potential gains.
Also a huge majority of the people investing in those things are just being influenced by someone on social media/seminar/whatever to do so and this is again wrong. You want to invest in something because you have done your own Research and believe in this thing and not because someone has been very appealing with his theory.
There are loads of pump and dumps going around in penny stocks and crypto currency and as a beginner it is easy to get into that trap with promises of huge returns. And if you are buying something with the hope of making a lot of money quickly you are not investing, you are speculating.
6. Not Having a Strategy
A lot of people just go into the markets to kind of see what happens. If you are serious about it and want to make any returns you need to have some form of a Strategy. You need to know how much of a risk you are willing to take, what kind of returns you are looking for and and what is your time horizon. You also need to know whether or not you are going to need the money at some point.
Once you know all the answers to those questions you might want to ask yourself if you want to invest for income(dividends) or growth(price appreciation). Of course you can have a mixture of both, but it is a good idea to know your plan and the best way to achieve it.
The importance of having a plan from the beggining is that it makes your life so much easier in the long-term. It can get very messy if after a couple of years you realise that you have been just investing chaotically without much of an idea.
It is important to stay in control of your portfolio and know what are you doing and why are you buying certain stocks. If you don’t have a good answer to this question it is better to stop and find it out before you continue investing your money.
7. Choosing Expensive Brokers
This is pretty important, especially for the new investors. Trading fees can quickly add up and slash a lot of your returns. Some brokers charge various amounts of fees and if you don’t check properly you can end up paying most of your returns in the form of fees. Except for buy and sell orders there can be quarterly/annually maintence fees, currency exchange fees, deposit and withdraw fees and all kinds of others.
Now the good news is that things have changed and now we have options to choose brokers, which do not have all of those, saving us a lot of money and this way boosting our returns.
For the US good option is M1 Finance, for everyone in the UK a good option is Freetrade. Both of those offer zero-commision trades, which gives you the chance to start investing even with £10. For everyone around Europe a good option is DEGIRO. They offer a simple interface with all the functionality needed for someone to start in the stock market.
Investing costs should not be underestimated and it is important to make the calculations on what is the best option for you platform-wise. Yes if you have millions in your portfolio maybe £10-£15 per trade are not going to be a big deal, but for all the beginners it can make a big impact on your returns.
Conclusion
Getting the basics right is the most important thing starting out in the stock market. As a matter of fact most of your returns are going to come from the fundamentals- the way you have built your portfolio in the first couple of years. After that it is mostly adding up to existing positions. That is why it is so important to try and make as little mistakes as possible when starting out. Of course everyone makes mistakes, but that is why we need to learn from them and build a solid foundation for the future.
That is all from me today guys, hope you enjoyed the read. If you want to get notified for new articles don’t forget to subscribe.
Disclaimer : Investing carries a risk of loss.
