5 Biggest Trading Mistakes that New Traders Make
Written By: John Edward Yu
Everyone wants to get rich. Today, all of us have access to different kinds of investing opportunities. The stock market is not only for the rich anymore. You can even open a brokerage account for as much as P1,000. Kids have access to crypto currency, forex, etc. Trading the stock market and Crypto is the most popular form of Investment right now. I’m here to point out the top 5 trading mistakes that investors and traders usually make so you can avoid them.
1. Ignoring Risk
New traders are very prone to this. You open an account, fund it, and in a matter of days you are fully invested in the market. People don’t know that they need calculate the amount of money they want to risk before they buy a stock. This pertains to how much money you decide to put in a certain investment or stock. Failure to understand this process will surely blow up your trading account. Understand risk first, and evaluate you risk tolerance before diving in any kind of investment.
2. Cost VS Value
People often fall victim to this. They think that a low share price means it has a greater potential of going up. This is a public misconception. A P12.00 stock can be worth more than a stock that is trading at P2.00 per share and vice versa. The secret here is to check at the company’s financial statements, and market capitalization to know how much the company is actually worth. For example, a stock trading at P2.00 can be worth P500 Million while a company with a share price of P10 can be worth only 2 Million pesos.
3. Panic Selling/Buying
Do you find yourself buying a stock that everyone is raving about? How about selling at the low when the stock that you love so much suddenly drops 10% or even 20% in a day? Yes, most traders are prone to this. It’s hard to make decisions when emotions are present. The fear of missing out on the next big stock pushes you to buy stocks at expensive prices, while the fear of losing forces you to sell when the stock suddenly turns and goes down below your buying price. This happens when you do not have a clear trading plan. This can be easily avoided by crafting a concrete plan for your investments so you won’t have to make snap decisions when markets turn bad.
4. Risking too much
Traders usually take on too much risk or put their money in high risk investments to yield greater results. An example of this investing in crypto currency without knowing the risks. The key is to diversify your money into different investments and invest them in the things you know.
5. Get rich quick
People think that if you are trading the stock market, investing in crypto or working in the finance industry you are filthy rich. Everyone wants to get rich fast, they hear stories of a stock doubling in less than a month from friends, and everyone wants to be in. This is not the reality. If you expect that your investment will return 20% in a month, 100% in a year then you have mistaken. Stocks gain in value through time, while some stocks can double in a week, most of them will likely to crash and leave you with a loss rather than a gain because the market is filled with crooks. The pump and dump scheme is very rampant. You must first understand this before putting your money in speculative companies.
The Stock market is a great way to build wealth. Unfortunately a lot of people think it is a quick way to earn money. They dive in, put in their hard earned savings blinded by how much money they can earn in a short period of time not knowing the risk they are making. Do not get me wrong, the stock market will give you a lot of opportunities to make money, but you need to understand the basics first before trading or else it will just be the same as entering a casino. I know this, because I have personally encountered these in my trading career.
I hope this article finds its way to new traders so that you can avoid the mistakes I made when i was younger. Remember to always invest in what you know and mange your risk.