At the risk of stating the obvious, everybody who invests money in the stock market does so with the intention of eventually taking more money out than they’ve put in. Nobody buys any stocks or shares with the expectation that they’ll lose their cash, but loss is sometimes inevitable on the markets.
As every financial adviser you ever deal with will tell you, the value of any stock can go up as well as down. The key to success is recognizing when your investments have reached the peak of their potential value, and selling at the right time to make the maximum possible return.
Even the best and most experienced stock market experts and financial advisers sometimes make bad calls about the performance of stocks and shares, so it’s not surprising that some people compare the stock market to the games at online slots websites.
It’s a fair enough comparison to make. You can’t guarantee whether or not you’ll make money on an investment any more than you can guarantee you’ll win anything when you spend money playing online slots with 10 free spins. You’d like to think that you can exercise a little more control over your chances than the average online slots player, though. Online slots are almost totally random in their outcome. Stocks don’t necessarily have to be.
We can’t offer you a surefire way of making money out of your stocks and shares, but we can impart a little wisdom that might help you to avoid the worst pitfalls. Here are five mistakes we’ve seen other people make on the stock market, and we list them here in the hope that they won’t happen to you!
Moving Too Late
When the value of a stock starts to move upward, more and more people start to buy into it. The more valuable it becomes, the more press coverage it’s likely to receive. By the time news of the stock’s rising value reaches the press, though, the peak of the price might already have been reached. You could invest in a fun in the belief that it’s still got further to go in terms of price, but it might have hit a plateau by the time you spend your money.
The same is true of stocks losing value. There’s an optimum time to get out, and it’s not when the value of your holding has halved. Even big, well-known brands have a point of ‘peak performance’ (some people are wondering whether Tesla is at its peak right now), and so knowing the difference between a stock that’s still got further to go and a stock that’s hit the top is a key skill for investors.
Whether we’re conscious of it or not, money is an emotive subject. The majority of people are happier when they have money than they are when they don’t. To put this in basic terms, that means losing money makes us sad, and making money puts a smile on our face. As true as this might be, we have to cut our emotions out of any investment ideas.
You might want to invest in a stock because it’s ethical, or it belongs to a company or industry that appeals to you. That’s no good if the stock has no prospect of ever turning a profit. At the same time, we need to keep a check on our unhappiness if a stock takes a sudden drop. If the reasons for the drop are short term and there’s a valid reason to believe that the stock will recover, selling is rarely a good idea. We all need to learn to control our emotions when we’re investing our cash, and it’s a difficult skill to attain.
Going Solo Too Early
There’s a reason that financial advisers take so many exams and are so heavily regulated. The job that they do isn’t easy, and if they do it incorrectly, they can be fined. The knowledge that a financial adviser has takes years to acquire, and they use that knowledge to make recommendations to you.
If you’ve been through an adviser and had some success with your stocks, you might find yourself beginning to resent the fees that your adviser charges. That’s understandable; after all, those fees eat into your profits. The problem is that some financial advisers are so good that they make the job seem easy, and so their clients can gain false confidence that they know enough about the markets to make investments on their own.
When you choose to invest your own funds without professional assistance, you have no protection and no support. Far too many people have decided to go it alone without an adviser before they’ve accumulated enough knowledge of the markets, and often they pay a heavy price for doing so.
Setting Arbitrary Targets
The stock market does not care about your spreadsheets. It doesn’t care what your target profits are, and it doesn’t care what your tolerance is. You might think that you’re planning sensibly by, for example, always selling a stock if it drops 5%, or always buying more if a stock rises by 5%. That’s too simplistic a way to look at the markets, and if you’ve made money trading that way, it’s more likely to have been by luck than judgment.
You’ll sometimes miss out on incredible opportunities if you allow yourself to be blinded by statistics and targets. Some stocks are exceptional, and so you have to make exceptions for them. Bailing out on something because it’s dropped 5% is an awful mistake to make if it recovers by a factor of three times that amount a few weeks later. Just look at the trading history of Bitcoin if you don’t believe us.
Not Spotting Patterns
Making money in the stock market isn’t just a case of checking in every now and then to see how your stocks are doing, and making decisions based on the lay of the land on that particular day. It’s much longer-term than that, and far more intricate. You should be assessing their performance regularly, and tracking their progress on a graph.
Take note of the times of the year they go up and down, and what influences them going up and down. Over time, you’ll learn to spot patterns – and that helps you to spot the same patterns appearing in other stocks. It’s impossible to predict a stock’s behavior with total accuracy, but if you can anticipate how the market might react to a specific event based on what you’ve seen in the past, you can dramatically improve your chances of making fast money from it. Only time and attention to detail can help you with this.
Those are our five takeaway points for you. Don’t wait too long, don’t let emotions cloud your judgment, don’t walk away from your adviser too early, don’t set meaningless targets, and always keep thorough records. If you can master those five basic skills, the world of finance is your oyster.
Interesting related article: “What is a Trader?“