It is the start of September and we can tell you one thing for sure – Stock trading is HOT right now! The Covid-19 pandemic crisis did what nobody could ever do. It gave rise to unprecedented digitization of all economic processes. People started getting interested in more digital ways of making money. And stock trading has always been a great option for those who have a working knowledge of the market.
U.S. digital stock brokerage platform Robinhood signed up 3 million new users in the first five months of 2020, giving it 13 million total customers. Stock trading has always been in direct competition with investing in index-tracking funds with investors mostly leaning towards index-tracking funds. However, after the start of Covid lockdowns, stock trading is back in style!
Mrs. Gunjan is a stay-at-home mom who loves buying tech stocks during market crashes. Mr. Sanjeev Sharma is a data scientist who uses machine learning to analyze trading patterns. And Mr. Siddharth is an economics professor at university who’s betting from his observations that the market is about to plunge.
These 4 non-professional traders use completely different approaches but have one thing in common. They’re very optimistic that they’ll be benefiting from the market highs and lows, and are certain that they will earn returns ranging from 25% to 50% this year.
However, optimism won’t be enough when it comes to making big money. Stock trading is loaded with heavy life altering risks. A lot of it comes down to acute observations and detailed planning. Since the stock markets are full of first time investors, we compiled a list of 6 common trading mistakes you must avoid making:
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1. Chasing High Stocks Without Extensive Market Research
This is one of the most common mistakes that a first time investor makes. Most people, who are investing for the first time come with an inflated sense of ego and make brash decisions based on their assumed “good luck”. They look at whichever stock is performing well today and blindly invest in it. What they fail to do is the astute market research that investing of any kind demands. Be it stock or mutual funds, investments are always subject to market risks.
Mr. Vaibhav who is now a successful trader learnt from his past mistakes extensively, especially the ones that he made when he was an amateur. When he started trading, he would impulsively invest in high performing stock and once ended up losing 60% of his portfolio.
However, after learning all these painful lessons he started making better well-researched decisions. At the start of Covid-19 pandemic, he anticipated a huge fall in the market and started to redeem most of what he had invested. His biggest nightmare came to fruition when NSE started falling but he was in the clear because he had secured most of his money and invested in other sources. He is up by 60% today, all of which he claims can be attributed to his astute market studying.
2. Five Year Rule: Not Investing Important Big Money
Remember, the 5 year rule before plunging large chunks of what you have saved into the market. By design, markets are subject to highs and lows. When you trade stocks regularly you would know how one global event leads to another and multiple small changes end up leading to a major change.
Mr. Sanjeev who is in his 40s lives by the 5 year rule. He learnt a lesson when he was young and that is one must not invest money that they will need in the next 5 years for buying bigger, important stuff. It could be money for buying your own house, marriage or your child’s education. Long term investing has an edge over short term investing since the gains and losses get balanced out over a long period of time. So, it is not a good idea to lock away important much-needed money into stocks for a long term.
3. Using Complicated Investment Tactics When Beginning
Expert investors, let alone newbie investors have a hard time managing complex trade cycles. When you stand on already wobbly knees, why would you want to start jumping on them? This is the one of the most common trading mistakes people make. Point being, unless you are sure of your tactics and have enough experience in the financial field, avoid using complex trade mechanisms.
It’s never been easier for investors to use leverage, options and short-selling, but amateurs should avoid complicated tactics like these until they understand how they can backfire. Nowadays, there are many financial apps available for investors. People download these fancy apps and instead of making simple trades, they end up making complicated investments. Later on, they bear the brunt if the market crashes. We concur that these apps are a great platform to trade but it will be a good idea to be wise about where you start.
4. Starting Big Instead Of Small Is Another Common Trading Mistakes
Another one of the most common trading mistakes people make is starting with big money/ However, if you talk to an advisor before starting trading you will be able to make wiser decisions. Mr. Batra founder of independent equity research website Marketsmojo.com says, “Plan your investment journey properly. Instead of chasing low brokerage fees, chase a proper advisor.”
After Mr. Rajesh sold off his restaurant business, he decided to invest the money he got in stocks. Rajesh was hesitant about paying fees to a money manager but he ended up giving her great advice. Since he was a first time investor, he advised him to start small. He bought modest stakes in household names, such as the Philips carbon. Eventually, he grew confident enough to switch to high-octane tech stocks like Facebook and Netflix. While sticking with his strategy from moving from small to big, he ended up making big money.
5. Obsessively Checking Your Portfolio
It is very easy to slip into the cycle of checking your portfolio obsessively. Timing the market, tying your emotional make up to the changes of the market and making hasty decisions only to regret them later are all results of checking your portfolio every day. Yes, we understand that it can be tempting to keep looking at the daily swings in your stocks’ prices, but if you do this every day, it gives rise to panicky trades and losses.
Over time, Mr. Sanjeev says that he built a risk tolerance. After the Covid-19 pandemic struck, he resisted the urge to panic and make regrettable decisions. Instead, he bided his time and prepared to add to his positions in healthcare “winners” which were growing despite the difficult times. This decision gave him huge profits in the last few months.