Developing an investment portfolio is a valuable step towards a financially secure future, but if you’re going to play the stock markets, you need to have a plan and appropriate guidance. That’s because, unlike putting your money in a savings account or bonds, stocks are risky – bad choices lead to losses and can jeopardize your financial security. Too often, new traders approach the market with undue confidence, and this can have negative consequences.
Before you invest your money in any stocks, take some time to do your homework and study market trends and individual companies, and develop a considered investment plan. This will help you avoid common careless mistakes and begin growing your savings from the start.
Mistake 1: The Homogenous Portfolio
One of the first rules of investing that everyone learns is that it’s important to diversify your portfolio. The difficulty with this lesson, however, is that it’s given a lot of lip service, but rarely explained, which can leave investors with a misunderstanding of what constitutes diversity.
In one sense, a diverse portfolio is one that contains a few different kinds of investments: a savings account, stocks, bonds, and a retirement account such as a 401(k). Spreading your money across such different investment formats protects you from losses if one sector goes into decline. But this is just one aspect of what people mean when they tell you to diversify your portfolio.
The other sense of diversity in investing is in regard to the types of stocks you invest in. If you’re very interested in technology, for example, you might choose to invest largely in the tech sector. But if we’re facing an unrealistic inflation of that sector, like the dot-com bubble, when the bubble pops your money will be gone.
Instead of investing in stocks from a single field, diversify your portfolio by choosing stocks from different sectors: energy, technology, biotech, or anything else that looks promising. That’s the aspect of diversification that too many investors miss out on.
Mistake 2: Missing The Trends
When you’re investing in stocks and keeping good records of your trades, one thing you’ll discover is that penny stocks move in patterns that can be relied upon. Higher priced stocks have patterns too, but tend to be more stable overall, showing little activity at all for an extended period of time, or bouncing up and down constantly but showing little overall change. Penny stocks are often more volatile as they find their place within the market. As you track these behaviors, you’ll get a sense of what causes certain trends that result in different types of market activity.
One common error that new traders make because of lack of familiarity with market trends is getting too nervous when a stock goes into supernova mode and selling prematurely. Supernovas typically happen when a company is in the news. Maybe it has issued a press release or announced a new product, which draws attention. New traders, unfortunately, get worried that the increase in value is unsustainable and sell too early, sacrificing profits.
Mistake 3: Trading Emotionally
Lack of knowledge of market trends leads directly to this next common mistake: New traders get too emotionally invested in their stocks and trade based on feelings rather than research. The anxiety motivating an early sale on a supernova stock is an example of this. The research would say to hold on to the stock for greater profits, but emotions demand that you let go now. Don’t get caught by this one.
Mistake 4: Failure To Plan
Investing in options is a more advanced undertaking than traditional stock trading, and as such it requires more savvy, but one of the most common errors traders make when it comes to options is a novice one: They don’t develop a plan before expiration.
Options expire on a regular basis, so you’re always working on a timeline. Don’t let the timeline sneak up on you. If you choose to invest in options, make sure you decide what you plan to do with them before they expire, or you’ll be out that money.
If you can avoid these four common mistakes as a new trader and develop an informed investment plan, you’ll be making money on the stock market in no time. The key is to proceed intelligently and cautiously, in proportion to your growing skill and understanding.