Making mistakes is part and parcel of investing, and it is impossible to make accurate judgments all the time. However, if you exercise more caution and common sense when making investment decisions, you can keep unnecessary risks to a minimum. Here are a number of common mistakes that you should try to avoid when you are investing in the stock market.
Use Too Much Margin
Buying on margin is using borrowed money to buy stock. While using margin can be an effective way to make more money, it can also lead to exaggerated losses. You may find yourself accumulating a substantial debt obligation if the investments you made on margin do not go well. In addition, you need to monitor your positions very closely when you buy on margin because small movements in price can be accompanied by exaggerated gains and losses. Unless you have the time and commitment to keep a close eye on your positions and the knowledge to make sound decisions, it is best that you refrain from using margin.
Make Decisions Based on Unfounded Tips
Many people who invest in the stock market make their investment decisions based on tips from their friends, relatives, and the media. More often than not, these tips are unfounded. Do not be surprised if the recommended stocks plummet soon after you purchased them. Now, this does not mean that you should doubt every stock tip. Before you follow a tip, make sure you do enough research to determine whether or not it came from a credible source.
Conduct Day Trading
Day trading is a highly risky activity, and it should only be conducted by seasoned investors. Besides investment savvy, you also need to have access to special equipment in order to become a successful day trader. A fully-functional day-trading workstation can cost in excess of $50,000. Most online brokers are unable to provide systems that are fast enough to meet the needs of the true day-trader, and some of them require investors who wish to conduct day-trading to undergo formal trading training. This shows how demanding and risky day-trading can be. Unless you have access to quick order execution and the necessary equipment and expertise, you should think twice about doing day-trading.
Purchase Seemingly Cheap Stocks
This is a common mistake committed by investors, and it usually results from comparing a stock’s current share price with its 52-week high. You should not assume that every stock with a fallen share price is a good buy. The fact that the share price of a company was significantly higher last year does not mean that it will be more profitable this year. It is important that you find out the reasons behind a fallen stock before you invest in it because a low share price can be a false buy signal.
Even the most experienced and successful investors have made costly mistakes, but what separates them from average and failed investors is that they learn from their mistakes. Taking extra caution to avoid the above-mentioned mistakes does not guarantee success, but it can significantly reduce your losses.
