Buying and Selling Shares: 10 Mistakes You Should Avoid

Buying and Selling Shares: 10 Mistakes You Should Avoid

No matter how good an investor you are, you will still make some mistakes. Face the fact: mistakes happen, one way or another. So as an investor, you can’t blame yourself too much for the mistakes you do when buying and selling shares.

Most of the mistakes we do are a result of the combination of overconfidence, inexperience, and external factors.

However, we can try to prevent ourselves from committing mistakes over and over again. And the first step to doing that is to know which mistakes we do. If we know these things, we can point a finger on their reasons, and we can start fixing them.

10 Mistakes Investors Should Avoid infographic

We’ve compiled the most common mistakes investors do when buying and selling shares. Let’s start talking about them.

Attempting to time the market

Timing the market is not entirely a futile attempt, but it would be extremely ineffective. For one, there are many things that affect the way you time the market.

Rather than trying to predict the short-term direction of the market, many investors expand their time horizon. This means they’re in the game for the long haul. If you have a long-term horizon, you have the chance to ride out market crashes and storms.

Take, for an example, the crash predictions for 2016. Many investors clammed up and locked themselves somewhere to avoid the doomsday. As a result, they missed S&P 500 index’s 9.5 percent growth for the year.

See also: Systematic Investment Plan: An Introduction to Smart Investing

Acting upon uninformed tips

To get ahead of everybody, you have to mingle with everybody. Investors typically talk to other investors to get information that they’d otherwise not have by themselves. Probably sitting around a table and sharing cups of joe, they talk a lot about their investments.

And you can expect to hear them talking about tips and insider information regarding the companies where they own some shares.

It’s easy to get swayed by opinions and predictions. However, it almost always brings more problems than fixes to your investments. You shouldn’t buy or sell a share based on exaggerated information.

To avoid the possibly disastrous effect of this mistake, always do your homework. Research whatever the tip is about, and find some solid evidence to back any predictions. Keep yourself in the loop, especially about the companies whose shares you own.

Related: 5 Rebalancing Mistakes Committed in an Investment Portfolio

Not doing research

Think of this as a tendency of investors who gravitate toward the second mistake.

In other words, investors prone to committing the mistake above are also prone to this mistake. While researching the shares you plan to buy and sell is truly exhausting, it’s also beneficial. For one, you’ll be better-informed that other investors. Second, you will definitely have a heads up on everything that will possibly happen, not only rumors.

Remember that you are buying a share of a company with a balance sheet and business goals. Having this in mind will keep you on track. This will also let you know why the company deserves a place in your portfolio—or why not.

Read further, Fundamental Analysis: Intrinsic Value and Other Basics

Waiting too long for a loser to win

Many investors have investing biases, according to behavioral finance. And of these biases is the tendency to tag shares as either a winner or a loser.

When an investor thinks of a share as a winner, he or she will find it difficult to let it go. This is especially detrimental when the stock falls or loses all of its upside. Just because he or she thinks it’s a winner, he or she will ignore the losses. The investor will wait until the stock recovers and wins.

While some stocks do have the ability to recover from extreme slumps, the recovery doesn’t always offset the total losses. Most of the time, the recovery comes gradually. And by the time it reaches the level prior to its decline, the investor already lost loads of funds for it.

To fix this, determine specific conditions that will tell you to let go. Most of the time, waiting too long isn’t worth it.

Shooting in the dark

Investors are also prone to being overconfident. They shoot in the dark and just hope that they hit the bull’s eye. Simply put, they come unprepared, sporting no concrete plans.

This is one of the gravest mistakes an investor can do. You cannot play everything by ear. And if you try to, you’ll probably end up losing more than how much you started.

Others simply don’t have a clue how to plan. To fix that, you can grab a pen and a paper, and write down your goals. Then, enumerate the companies whose shares you plan to buy. Consider your portfolio, and then ask yourself how appropriate each company is to your portfolio.

Ask yourself questions like you’re interviewing yourself. Why do you need to buy that company? How long do you expect to be profitable through the business? When do you plan to exit?

This way, you won’t be guessing how well or badly your portfolio actually performs.

Day trading unprepared

a woman walking blindfolded

Some investors seek action. And to satisfy that need, they resort to day trading. However, day trading is a different beast. You have to acquire a different set of skills to efficiently undertake this strategy.

Day trading can mean the difference between hitting the jackpot and reaching your personal rock bottom, especially if you use huge margin.

To fix this, you can take some online day trading courses. Research about primers and basic as well as advanced day trading strategies you can find online. Better yet, find a day trader and learn from him or her. Nothing beats the firsthand experience of a successful day trader.

Using margin too much or too often

It’s understandable that rookie investors and traders want to buy and sell shares. However, their enthusiasm gets the better of them. This is also true when they’re using margin and leverage.

Using margin can really be a rewarding tactic if used properly. However, investors giddy up too much after hitting the jackpot once or twice. They tend to use higher leverage far too often. In the process, they forget the inherent risk present every time they use margin.

Using margin and leverage can magnify your losses as much as it can swell your gains. Therefore, it’s imperative not to use it recklessly. In general, you should manage the risks you expose yourself to. Again, research and discussion would help to know how leverage and margin work.

Buying fallen shares without checking fundamentals

A company’s shares can fall in value due to a plethora of reasons. And sometimes, investors overlook these reasons, confident that the stock will eventually rise again.

Many stocks slump in value because of short-term reasons. However, it’s also not uncommon to witness companies lose value and never reach the same valuation as before.

Therefore, it is important to check the main reason for the slump. If you think the cause is temporary or long-term. In general, you shouldn’t buy a share that has minimal chance for quick recovery.

buying and selling shares engraved on two dices

Going for Broke

Nowadays, it’s obvious that you shouldn’t put all your eggs in one basket—and we’re not only talking about diversification.

It’s never a good idea to wager all that you have for a single trade, no matter how big your chance of winning is. The loss is still too much to even imagine suffering.

And even if you manage to survive the loss, the psychological impact would greatly diminish your enthusiasm. Even small losses can keep some investors keep away from stocks—for good.

One good idea is to use dollar-cost averaging, where you invest the same amount of money at regular intervals. This can help you flatten out the shares’ value’s peaks and valleys. It can smooth out your average purchase price as it removes emotion from decision making.

Investing what you can’t lose

It’s important to invest what you can to earn more money. But it’s a little bit of a stretch if you risk even those not intended for investing.

When the fundamentals are good, and the stock doesn’t seem like falling anytime soon, it’s tempting to wager everything you can get your hands on. But there’s always the chance that you’ll lose.

You can’t sacrifice your cash intended for bills and mortgage. Remember that it’s equally important to keep a roof on your head. It’s better to allocate specific funds that you can risk and use for investing.

Conclusion to Buying and Selling shares

In buying and selling shares, avoiding these mistakes are very important.  Investors must keep in mind that doing it right includes extreme prudence. There are big rewards to acquire, but there are also tremendous losses.

You can lose a lot in just a single mistake. It’s better to arm yourself with carefulness to avoiding losing everything you have invested.

 

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