Some novice investors enter the stock market solely in pursuit of huge profits. However, it is better to consider it, first of all, as a way to save your capital, and then as an opportunity to receive additional income.
Be smart and avoid these basic mistakes:
1. Day trading
Day trading is not investing. This is speculation on short-term fluctuations in stock prices. Unless you are a professional trader, who, it must be said, rarely become truly successful, you should not even consider speculating in stocks. If you beat the market, it will be only in the short term, followed by loss of funds and disappointment.
Unlike traders, investors choose long-term holding of reliable assets and do not react to the current state of the market. They only sell stocks in extreme cases, either when the stock clearly has no further growth prospects, either to rebalance the portfolio, or after the planned investment horizon expires.
2. Buying shares in a single company
Buying shares of one promising company for the entire amount and expecting a profit of hundreds of percent is theoretically realistic. The key word is theoretical. In fact, such cases are extremely rare and very risky.
There is something called value investing. This is a strategy based on buying stocks that are calculated to be trading below their book (or intrinsic) value. But if this strategy allows you to at least slightly beat the market, then this is already good.
If we talk about big gains from mergers, bankruptcies or other factors, then in most cases they are the result of insider information that is not available to a private investor.
In connection with the above, the best option for a passive investor is still ETF-type index funds, with great diversification and without any technical and fundamental analysis.
3. Waiting for the right time
There is no such thing as “the right time to enter the stock market”. All the most successful moments of entering and buying certain securities are only visible in retrospect.
A passive private investor should not worry at all. You can buy the same amount of shares of the selected index fund once a month, regardless of the trend, thereby averaging their value. In the long run, you will still take profits, unlike the vast majority of active traders.
4. Use of leverage
In rare cases, this can be beneficial for traders, but absolutely superfluous for investors.
5. Market tracking
You will not get any useful information from financial reviews and streams. There, no one ever reveals any secrets of investing, and all stock market predictions are no more accurate than the weather forecast for the year ahead.
But you risk adding a fair amount of stress to yourself and losing a lot of time that you can spend more productively.
6. Too much personal capital in the stock market
There are different tips and tricks about what percentage of your personal funds you should keep in securities. I think it’s very individual for everyone.
But you need to understand that when you hear that someone has 90% of their net worth in the stock market, then it is likely that the remaining free funds can exceed the average annual income by ten times. Therefore, to describe the distribution of capital as a percentage in this case does not make much sense.
However, of course, there should always be a financial cushion in a separate bank account and other, even more readily available funds in the form of cash or precious metals. Because, despite our optimism, anything can happen.