Stock market participants are used to making mistakes; even the best and the most-researched traders and investors lose money making mistakes. But there are always those participants who lose a lot more and learn nothing from their mistakes.

Here are the 5 common mistakes that professionals in the market have learned to avoid.

Market timing: Every new trader or investor thinks about making huge profits. While there is nothing wrong with this thought, it is the concepts that a trader follows to achieve this goal. Market timing is a seriously flawed concept; one which should be discarded by everyone or else face huge, unnecessary losses. 

For example, September has a reputation as the worst month for stocks and solely based on this, beginners tend to go ‘short’ for the September series without factoring in other structural changes in the market. In the past ten years, the month of September has posted negative returns just twice; so much for being the worst!

Overtrading: Overtrading implies trading excessively to pare the losses or to make huge profits, even when there are no good opportunities available. Overtrading only makes the broker rich while the trader continues to go deeper into the trap. Self-fulfilling prophecy: One wonder of the stock market is that it gets the lazy brain to think, but very few realize that they might be ‘over-thinking’. Events such as the quarterly results, policy announcements, elections and others have often prompted the novice traders to take positions while being biased towards a desired result. But the market is not as simple as it seems to be; even a drop in earnings can lead to a rise in the stock price. Trend, what trend?. It is sometimes very hard to believe that a stock or an index can fly so high without taking a rest. Millions of traders have lost an unfathomable amount of wealth going against the trend. Remember, the ‘doomsday’ calls on S&P 500 when it was trading at 1600? Well, to put it politely, those analysts are nowhere to be seen now.  Putting all the eggs in one basket: Diversification is a great concept which greatly reduces the risks which any participant is never prepared for. Investing the entire savings into a single stock is as stupid an idea as it can be; even the “too big to fail” theory doesn’t work in stock markets and history is rife with such examples. The Lehman Brothers was the fourth largest investment bank in U.S. before falling to the recession.

By: Nikhil Gupta

Financial markets Researcher/Analyst