Top three mistakes newbies make in the Stock Market

By Sri Hari in Trading July 10, 2017

Jamie, the new investor was sweating. He does not know what to do with his shares in XCY IT company. His choice of stock was running like a bull last week. But today XCY stock was faltering and skidding. He had lost over 30% of his investment in last two days. Jamie was not sure whether to sell and cut his losses or stay put for a while until the stock bounces back.

Jamie is not alone. Every year thousands of new investors enter the market and lose $$$ of their hard earned money. They swear away from the market but once in a while, peek at the one stock they wish they had brought early.

Stock markets are the biggest casinos in the world and if you enter them unprepared, be ready to lose your money in the wink of an eye. Thanks to easy accessibility via brokers/ banks and apps, anyone can invest in stocks.

What are the common mistakes committed by new investors?

1. Investing without research

A gut feeling is your second biggest enemy in the stock market. The first being lack of education. When you want to buy a new mobile, do you base your buy on your gut or do you read a few reviews, watch a few demos and then decide? A smart buyer always conducts his research before buying a product. Before you buy into a stock, do your research.

Some people follow “If you see a stock climb up 3 days in a row, buy the stock” philosophy. Typically on the 4th day, traders will book profit driving the price down. And so late entrants will loose money.

If the share price of a company is moving up every day, find out why it is moving up. A seasonal bump? or was a big ordered clinched? Find out what is driving the price before you invest.

2. Not knowing the fair price for a Stock

The average price of Petrol in the UK is £ 1.19 GBP. If you buy for £ 1.15, that is a good buy. At £ 1.21, not a good buy. There is a relationship between the international crude price and the average rate you pay in the UK. Then you know if the price is fair or not.

The share price of a company works in a similar way, with one major difference. There is no international benchmark for a share price of a company.

Identify a fair buying by looking at factors such as valuation of the company compared to peers, earning per share. This will help you know if a share is under-priced or overpriced.

3. Investing based on a tip

“I will buy this stock because famous people on TV are talking about it.”

The above quote is not different than the cartoon bellow…

A tip or a TV guru’s pronouncement is never a good reason to buy anything. You have better luck winning a horse race based on tip than making money on the stock market. Anyone in the real know will never reveal. That’s how they can profit from the news. A tip based on privileged information (insider information) is a crime in most countries. And a tip based on gossip and anticipation is just going to make your bank account lighter. So stay away from tipsters.

What will happen to Jamie the new investor now?

Jamie will exit the stock sometime soon. Statistically, he will lose money and will be another one to swear off the market.

Jamie’s is not the only way to enter the stock market. If you choose to be smart, The stock market can be profitable. But the markets need education, patience and humility. We have a few recommendations on the education part.

Before you open a trading account get this book “Stock Investing For Dummies”. Spend at least a month or two in studying the market before you venture out. You can try paper investing, where you choose 2-3 stocks, invest paper money at a price and track their movement. verify if your educated guess came out right or wrong. While this may look like a childish game, it sure helps you understand the basics of the market. You will be way ahead of Jamie the new investor.