Traders with no experience in financial markets repeat the same mistakes that cost them dearly. Although successful trading takes a lot of hard work, self-discipline and determination, obeying just a few simple rules will result in much better performance even for beginners.
Nowadays trading stocks online is easier than ever before, and that is why increasingly more people are encouraged to invest on their own, rather than relying on mutual funds or money managers. Beginners tend to make common costly mistakes in their trading. The present article discusses such mistakes and explains how they can be avoided.
Know What Financial Figures Tell You About a Company
In order to make profits, you need to buy shares low and sell them high. That is not as simple as it sounds though, because interpretations of readings vary greatly on the market. For instance, high valuations for sellers may seem low to buyers. Knowledge of the metrics is pretty important, and learning about basics such as book value, dividend yield, return on investment and price/earnings ratio is essential. After those are mastered, the more complex stuff can be studied.
A Word On Penny Stocks
Initially, beginner investors may be tempted by penny stocks which offer more shares for a given amount of money than, for example, blue chips. In that way, investing can possibly yield more profits. There is another factor involved, however, and that is volatility. Penny stocks can both soar and slump at a more rapid pace compared to other shares, and the reason for that is lower liquidity. Another disadvantage is that it is difficult to find enough information from reliable sources on such stocks.
Manage Your Risk and Beware of High Leverage
Investing all disposable money in a single stock, a currency pair or a bond is yet another common mistake made by inexperienced traders. This lack of diversification is sure to result in money loss at some point. The wise approach is to invest gradually so that one is able to remedy his mistakes without risking the entire capital.
Leveraging funds by using a big margin is like risking all, but it entails more damages, as it augments not only gains, but also losses. Practice helps to learn how to control capital at risk, and until experience is gained, it is advisable to be cautious with leveraging. Keep in mind that with some highly leveraged products, losses can be greater than the initial investment!
It should be remembered that investing takes a longer term, so cash should be set aside rather than having the entire amount put into action. Although cash invested in the market in bulk could yield better returns, reserves should be available to use in emergencies or when opportunities arise.
News Trading Could Be Dangerous
Chasing news is yet another dangerous move for inexperienced investors. The chances for success of this strategy are negligible due to at least a couple of reasons. First of all, a lot of sources are not trustworthy. Making an investment decision on such a source could easily result in a trading loss. Secondly, even if the news comes from a reliable place, there is a big chance that institutional investors have already made their stakes, and the news is already calculated into the price of the corresponding financial instrument that it concerns. It should be kept in mind that institutional investors always access important news releases first. That is why, the safe rule for beginners is to invest in familiar companies which they have dealt with.
To sum up, traders lacking in experience should not start big in their investments, so that the risks to their capital are not too big. With more patience and practice, beginners can become more confident and feel the market sentiment better. The above rules can help freshers and lead them through investing in stable markets, before they launch their activities on more comprehensive scales.