When I started out in the stock market, I had to learn everything from scratch. I was not prepared or knowledgable enough. I had to learn by trial and error. Let me share some of the common mistakes I made that you can learn from when starting out in the stock market:
1. Lack of Financial Goals
Without direction, there can be no actual progress
Beginners in the stock market often do not have clear reasons for being in the market. We have to clearly set our financial goals in order to know which stocks and which trades to get into.
In my case, I am a fan of passive income; but, since I am still young, I also want to take advantage of the greater returns capital appreciation can bring.
In order to make my financial goals clear, I have one brokerage account dedicated to building my passive income over the long term. This is where I hold high dividend yielding stocks and preferred shares that payout at regular intervals.
My second brokerage account is where I do swing trading for the medium term. This allows me to select stocks that are appreciating for buying and selling purposes.
Separating brokerage accounts is one way of organizing your funds so that you do not mix up your financial goals and your capital. You have to determine what your goals and priorities are, in order to allocate your funds appropriately.
2. Overdiversification
Sometimes, playing it safe can do more harm than good
With such a diverse selection of stocks in the market, it can be overwhelming to choose the right stocks to buy. This is why most investors would recommend diversifying to reduce risk.
"Don't put all your eggs in one basket," They say.
So we follow the advice and buy 10 to 20 different stocks with our limited capital. The problem with this is that we overdiversify, lessening our reward while trying to lessen our risk. We hold stocks that are outperforming, as well as stocks that are mediocre or even underperforming. Not to mention how difficult it is to monitor the performance of 10 to 20 stocks in a single portfolio.
I used to have around 8 to 10 stocks in my portfolio with roughly the same amount in each allocation. This grew tiring to monitor, and even significant percentage gains did not bring about significant capital appreciation.
Now, I only hold 3 to 4 stocks for my swing trading. This makes it much easier to monitor, and I experience larger gains as well (not to mention losses, so be sure to cut your losses as soon as possible!).
3. Conflicting Technical Analysis
Too many signals and indicators can be confusing
Different methods of analyzing a stock can be found all over the internet. We hear terms such as moving averages, stochastics, volatility indicators, and so much more!
There is an indicator for everything from stock prices to trading volume to value turnovers. Beginner investors can get confused as to which indicators really matter and which they need to use.
What's important is that you find a method that works for you and your investment timeline. Choose the least indicators that tell you the most important information to guide you in your technical analysis when buying and selling stocks.
These are just a few of the most common mistakes of investors I come across in the stock market. What's important is that we educate ourselves before risking our capital in something we do not understand. The stock market is full of trial-and-error, risk-and-reward strategies, and only the diligent and patient can consistently win. Are you one of them?
Do you have the right mentality to succeed in your career and investing? Find out here.