Thinking of investing or trading in the share market to make some extra bucks? Why not? you must have heard many reasons to invest or trade in the share market on media channels. Most of the people get inspired by investors who made their fortune out of stock market investment. However, when it comes to real investment or trading in the stock market, most of us make losses. I have listed 8 common stock market mistakes that almost every newbie makes.
Investment in the stock market is an art that comes with experience. Trading on the other hand is a game of perfect timing, understanding of market trends, and a lot of experience. It is very important to understand that, the stock market is not a machine which will make you a millionaire overnight and things or strategy that works for others will work for you as well.
Based on various stories I heard from my connections and online forums, I have compiled the following common mistakes made by beginners in the stock market.
- 8 Common Stock Market Mistakes That Every Beginner Make
8 Common Stock Market Mistakes That Every Beginner Make
1. Starting With Intraday Trading
Most of the beginners in the share market open their trading account just because they want to make money every day with intraday trading. They have been seeing stories over internet and television channels about people making thousands of dollars every day by Intraday trading in the stock market. But, they failed to understand that, it’s a trick to get you onboarded with intraday trading.
Intraday trading is very risky especially for beginners as they don’t have experience or expertise in doing it. In intraday trading, you have to buy and sell stocks or any security is a single day i.e. you cannot carry your position for the next day. Therefore, even if you are making a loss on your position, you have to close before the market’s cut off time.
Intraday results in bad habits and many times it becomes gambling like an addiction. If you know what you are doing then it is fine but if you buying security without any homework then it’s very risky. The success rate of the intraday trading is only 10% (as per the forbs) and the remaining 90% trader book heavy losses.
2. Trading With Margin
Trading with margin amount is another stock market mistake that beginners make. Margin allows you to but stocks more than you can buy with your fund available in trading accounts. Almost all brokers provide margins for the trade without any additional charge. E.g. if you have $1000 in your account and your brokers provide 10X margin then you can trade with $10000.
It sounds great right? Many traders consider trade margin as an advantage but in reality, it works oppositely. It could generate good profit if the trade is going in a positive direction but it could eat all your trading fund if it goes in a negative direction.
You have the option to carry your position to the next day if you are trading with your capital but, you will be forced to close your trading position if you are trading with margin money. Some brokers allow you to carry your position to the next day with margin amount but they charge heavy fees for it.
Brokers are providing margin without any charges because they want you to trade more. Broker’s profit depends on your brokerage and your brokerage depends on your trade turnover. With the margin amount, your daily turnover also multiplies by 10X and it’s good for the broker. Therefore, don’t believe in the benefits of margin even though it is explained by your broker or some random guy on the internet.
Average investors who try to do a lot of trading will only make their brokers rich. – Michael Jensen
3. Trading In Options And Futures Too Soon
Contracts of options and futures come with an expiry date and you have to close your position before that. Option is the financial instrument that is derived from the stock or index price. You don’t need more money to trade with options and futures therefore it is very popular among the newbies. You will be predicting the stock price or index movement direction i.e. Call (uptrend) and Put (downtrend).
It works well when the market or a stock is going in one direction. E.g. If you know the stock of Apple Inc. (price $300) is in an uptrend and it will continue the trend for some time, then you can go for the future contract of 1000 share by just paying margin amount (say 20%). Therefore your profit could be 5 fold if the market goes as per your prediction and but it goes against you then you have to book 5 fold losses.
It is being promoted as limited loss and unlimited profit and it works as a make it or break strategy. The probability of losing all the money in this strategy is more than making any profit. There are big players involved in this game and I strongly suggest staying away from it and avoid this stock market mistake if you are just entering into the share market.
4. Lack Of Patience And Emotion Control
To remain profitable in the stock market, every investor needs to have patience and emotion control. It is required to capture the right stock or securities at the right time and exit on time if the market or stock is behaving as predicted.
However, it is not easy and patience and emotion control cannot be developed in a single day but one needs to try their best and keep improving. Lacking these skills results in money loss and confidence in the stock market.
Share market is a device for transferring money from impatient to the patient – Warren Buffett
Therefore, being a beginner in the stock market one should know the importance of patience and emotion control and try to avoid this stock market mistake wherever possible.
Don’t stick to a stock if the company is showing poor performance and stock price is not holding up.
5. Unrealistic Expectation From Stock Market
Share Market could offer a better return on your investment and this is the reason behind the new Demat account being opened every day. However, many people failed to understand that, the share market is not a money-making machine. Share market is a place where you can invest in good companies and grow funds along with the company.
Many people come into the stock market because they think to double or triple their investment in a month or two. Such unrealistic expectation from the stock market just creates frustration in them and eventually they end-up making losses by picking wrong stocks.
Like other investment instruments, you should consider the share market as an investment opportunity and don’t expect to become rich quickly. People should always put money in good performing stocks and they should be happy with reasonable profits.
As long as greed is stronger than compassion, there will always be suffering. – Rusty Eric
6. Finding A Hidden Gem
What comes in your mind when you hear “Hidden Gems” in the stock market? Probably a stock which is unknown to the majority of investors and has the good potential go multiply investment 100 or 1000 times. Well, the majority of people in the stock market think the same.
People believe in hidden gems in the stock market because they hear success stories of many investors who made truckload money after investing in hidden gem stocks. I don’t think there is a way to identify hidden gems by looking at stock’s price or financial information published on their websites. Even if hidden stocks exist then it is difficult to find unless you have the company’s internal information.
New investor’s in the stock market waste a lot of time searching for the hidden gems to earn quick money and end-up investing in bad stocks suggested by some random guy on media or the internet. Therefore, invest in quality stocks with good fundamentals and have patience, you will be rewarded eventually.
7. Jumping In Stock Market Without A Strategy
This is a very common stock market mistake that beginner makes. Most of the newbies in the stock market lack strategy or their aim. Most of the time they enter into the share market because they see their friends or relatives are investing in the share market and it is working well for them. They are just influenced by online stories or nearby people.
Well, this could be dangerous, if you have decided to enter into the share market then make sure you know the basics of it. Every trade or investment should be executed with a proper strategy.
You might ask, What should be the strategy?
If you are a trader then you should know why you are choosing security for trade, what should be the buying price, what should be the stop loss, and finally what is your target price to exit. You should have the strategy planned before investing money and strictly follow the same.
You should have your strategy for investment or trade because the strategy which is working for others, simply might not work for you.
8. Ignoring The Stock’s Fundamental
This is the last stock market mistake that beginner makes from my list but not limited to. However, this could be the case for most of the intermediate level investors as well. People usually take buy or sell calls based on the current price of the stock which is not the correct way.
Stocks with good fundamental values tend to perform well in the long run therefore, don’t forget to do your analysis before investing a penny in the stock market.
Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. – George Soros
Investment in good fundamentals stocks guarantees long term growth and helps in building wealth. Therefore, this stock market mistake should surely be avoided if you want to work in the share market for a long time.
- Who Makes Money in Intraday Trading?
- Does Long Term Investment In Stocks Always Profitable?
- Shocking Truth About Hidden Gems In Share Market
These were my top stock market mistakes that every beginner should avoid to remain profitable and confident. What was your mistake when you entered into the stock market? Please share it with the community int he comments.
I hope, my list of stock market mistakes that beginner make helps you to make a wise decision. If you like this article then please consider sharing with your friends and family and help them to learn the stock market better.