An instructional article about several common investing errors in the stock market
Don't lose money. Billionaire investor Warren Buffett himself has coined this popular mantra of the investment world. That's easier said than done of course, considering the amount of risks involved when trading in the stock market. Even seasoned investors have sustained losses at one time or another. However, by avoiding the following common investing pitfalls, you can minimize your losses and gain profits from your investments.
1. Putting your money on something you don't understand. So you've heard that your neighbor just had his house remodeled with the profits he made from the stock market. You want your own share of the pie too so you hastily purchase stocks of the first company you saw on the gainers list. It would have been funny if you were Homer Simpson but in reality, you have just made a very unwise decision. Before buying stocks in a company, you should first have a clear understanding of its business model and financial history. The stability of the sector it belongs to should also be taken into consideration. Even good companies with solid businesses could suffer from a nasty devaluation if its sector is in trouble.
2. Becoming emotionally attached to your stocks. It's tempting to hold on to your stocks even when sound financial reasoning tells you to sell them. After all, you've already spent so much time and effort poring over pages of market reports and corporate information until you finally found the ideal company you want to invest on. You also want to prove that you made the right decision in choosing that company. However, holding on too long to your stocks because of sheer emotional attachment could lead to huge losses. If your stocks have been on a consistent low and there are signs of trouble in the company, then be willing to sell even if it hurts. Remember: you buy stocks to make money; you're not supposed to marry them.
3. Putting all your eggs in one basket. You are not afraid of taking risks but you also don't want to end up penniless. Then your favorite word should be diversification. In building up your stock portfolio, be sure to acquire stocks from all major sectors such as property, industry, financial, oil, and services. That way, you prevent your entire investment from going down the drain in case one sector takes a nosedive. A good rule is to limit an investment to 10 percent of your portfolio.
4. Aiming for a turnover overload. The stock market is no place for impulsive buying (and selling). If you're into the habit of buying stocks and selling them after a short period of time with little or no gains to show for it, then your broker must be filthy rich with commissions by now. Keep in mind that each trade comes with transaction costs and taxes. If you're not careful, then what profits you have could be easily wiped out by the accompanying costs of your high turnover. You could also miss out on the possible gains of your investment in the long run.
Knowing the possible errors in stock investment is already a step ahead for you. There are still a thousand and one pitfalls out there that you may stumble upon but the important thing is to learn as you go along. After all, even billionaire investors make mistakes too.
Stock Investment Errors You Don't Want To Make
