Trading Mistakes That Can Leave You Broke
Updated: May 15, 2021
With the unpredictable Covid-19 situation at the moment, the stock market is behaving extremely volatile, which resulted in a lot of people entering the market and taking a gamble on the stock market.
Online trading platforms and brokers like Etrade, Robinhood, etc saw an increase of more than 150 % during the first quarter of the year, as the new investors stampede the market after the crash in March.
There are screenshots of various amateur trader especially the Robinhood traders flexing their wins on various social media platforms. But experts have mixed opinions about this whole scenario. Many seasoned investors criticized these newbie investors, stating that their risky investment will end in tears, while others have given them the props for jumping in the market at that right time.
If you’re a newbie using your free time and money to pick stocks, here’s are the few mistakes you can avoid and save yourself from going broke.
Trading Tips for Newbie: Mistakes That Could Leave You Broke
First thing first, before starting as a stock trader you need to make sure that you can afford it. You should have some kind of investment in a long haul investment account like 401(K) or Roth IRA before you start investing in the stock.
You should also more sure that you have enough funds for your living expenses and not invest that fund in the stock market. As an investor, you don't want to be forced to sell your stocks for a loss because you don't have money for your living expenses during a crisis.
If you are someone who can really afford the risk associated with the stock market, then you should follow these stock market tips and avoid these rookie mistakes as a new investor.
1. Investing Based On Latest Headlines
If you are making investment decisions based on the things everyone is talking about, you already missed the bus. Buying stocks based on the latest headlines is one of the most common and costly mistakes most of the new investor makes.
As an investor, you need to remember that a stock's value to you is what it will earn in the future, not the past or present. So if you are buying the same stock everyone else is, you should be prepared to keep it for the long haul. Usually, a sudden rise in the price of a stock is followed by a dip popularly known as the market correction, therefore you should only invest in the stocks where you see some long-term value.
2. Buying And Selling Too Frequently
Most of the newbie investors in the market are cursed by the phenomenon of trading too frequently which often results in a losing investment in the long run. As a new investor, you will fall into the risk of making emotional decisions based on what is happening in the stock market on a given day. That can lead you to buy at a high price and sell at low, which is the last thing any investor wants.
With buying and selling too frequently, you also miss out on the opportunity of tax-saving because when you sell an investment you’ve held for at least a year, you get long-term capital gains treatment, which means your profit is taxed at 0%, 15% or 20% depending on your overall income. But when you sell a stock you bought less than a year ago, your profit is taxed as ordinary income, which will almost always lead to a higher tax bill.
3. Not Using Stop-Loss Orders
Stop-loss orders are quite important especially for new traders because they limit the risk by automatically selling your shares if they fall below a certain price limit decided by the traders themselves. For example, you buy a stock of a company for $10 per share and put in a stop-loss order to sell your stock at $7, which means your broker will sell the stock if prices drop to that level.
The main goal of a stop-loss order is to avoid big losses, so when you use them, make sure that you leave some room for regular fluctuations that occur with any stock.
4. Buying Stocks Of A Company That Just Filed Bankruptcy
Recently, Hertz shares prices came down to 56 cents after it filed for Chapter 11 bankruptcy protection in May. Investors stampede in to grab what looked like a good bargain. By June 8, Hertz was trading at $5.53 before it crashed to $1.44(noted on July 17).
Based on the above scenario, it might seem like a smart idea to speculate on bankrupt companies trading for just pennies on the dollar, but this is a sucker’s investment because companies who declare bankruptcy have an unmanageable amount of debt up to their sleeves and in bankruptcy court, creditors and bondholders are paid in full before shareholders get a single penny which means that there is a wholesome chance that you will get nothing after bankruptcy proceedings, even if the company continues to operate.
But if you are still interested in investing in a company that has filed for bankruptcy, just make sure to only invest money that you can afford to lose.
5. Not Understanding The Real Meaning Of Portfolio Diversification
It is a well-known thing that it's not so wise to invest all your capital in one or two stocks. But sometimes even after owing stock of 10's of companies, your portfolio may not be as diverse as you think it is. Diversification is not just about buying stocks of different companies, it is much more than that. Diversification needs you to invest in companies that respond differently to economic changes and have different sets of risks.
Therefore to have a diversified investment, it essential to buy stocks not just across different companies but also across different sets of industries. One of the easiest ways to diversify your investment portfolio is to invest in ETFs instead of individual stocks.
We hope after reading this post, you will be inspired to move more cautiously and smartly in your journey as an individual investor. Just remember that everybody makes mistakes initially but don’t let the fear of making mistakes keep you down. The most important thing is to get started rather than getting it right on the first go.
If you are someone who is very new and don't know anything about investing, you can start here.
Thank you so much for reading this article, please feel free to leave your feedback.