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Avoid These Mistakes and Avoid Losses in Stock Market

Post on: 13 Апрель, 2015 No Comment

Common Problems Can Be Avoided by Stock Investors

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One way to make money investing in the stock market is to avoid losing it. This article looks at some of the more common mistakes investors in the stock market make and how you can to avoid them.

There are several groups of investing mistakes, including poor judgement, investing in stocks on a hunch, buying at peaks and selling at valleys are in one group.

Another group of mistakes investors are prone to make involve less technical decisions and fall into the area of emotional and fundamental decisions. Here are some of the more common mistakes:

Loving a stock: Investors become emotionally attached to a stock and overlook the company’s shortcomings. Maybe your father worked for the company and you inherited the stock, or you’re retired from the company yourself. Whatever the reason, separate your emotions from the hard reality that it may be time to sell .
Hot tips: Acting on hot tips is almost always a recipe for overpaying. By the time you hear about a hot tip, the professional traders have bought and sold the stock and made their profit. You will buy at the top of an inflated price that will almost certainly fall well below what you paid.
Forgetting trading costs: It’s easy to forget that it costs money now and in the future to make a profit on a stock trade. In the present, there are commissions to pay; in the future, you will pay a commission when you sell and taxes on any profits. Which taxes you pay will depend on how long you held the stock before you sold it. A stock must rise enough in price to cover all the past trading cost, future trading costs, the anticipated taxes, and still have a nice profit for you.
Poor diversification: If you fail to properly diversify your holdings, you’re setting yourself up for a major setback. An economic move against the stocks you are holding can cause an across-the-board drop in price if you are not diversified. Diversification lowers your risk by spreading your investing dollars over industries and asset classes. Asset classes are tangible assets such as stocks, bonds, cash, real estate, and other types of assets. These different classes form the basis of active diversification.

Speculating: Investors can easily forget they are investing for the long-term and be lured into the excitement of trading for the short-term. Traders buy and sell stocks over short periods: seconds, minutes, hours, days, weeks. It takes a great deal of experience and nerve to be an active trader. Most long-term investors don’t have the experience or risk tolerance for speculating and are lured into trading by the potential for gain, only to find it is hard work and not an easy way to make money.

Inability to sell: Investors sometimes have a difficult time admitting to themselves that an investment isn’t working out. They hold on irrationally, hoping the company is going to bounce back from the brink of bankruptcy. Investors should set a loss limit and sell when the stock hits that mark.

Giving up too soon: Investing in stocks is a long-term commitment: at least three years, and preferably five or more. Even companies with good fundamental economics may stall in stock price. If you had a logical reason for investing in the company in the first place, be patient and let the market catch up with your thinking.

Investors need a plan that includes when (what price) you will buy and at what price you will re-evaluate the stock. Allow for daily fluctuations, but be realistic when the fundamentals of a company has changed and it is time to let go.