Everyone knows someone who reckons they’re an absolute wizard stock market investor. They might even throw some fancy jargon at you to give off the impression they know exactly what they’re doing, but they may not be the best people to seek advice from when it comes to getting started yourself.
The thing is, investing depends heavily on individual goals, means and appetite for risk. Someone willing to risk a decent chunk of cash for short-term returns will follow a vastly different strategy to those looking to play the safer slow-and-steady game.
So no matter how much money your mate reckons he can make you with stock market witchcraft, don’t make these three common mistakes.
1. Going in blind
Winging it is a great way to lose money, especially when it comes to investing in shares. Unless a professional is managing your investments for you, knowing where to put your money, how long to leave it there and when to act on certain events can be daunting.
For those looking to manage their own investments, research and practice are pivotal. Platforms like eToro might be a good place to start as it gives the option of mock portfolios for beginners, letting them get hands-on experience with the market without any of the risks. And when you are ready to get money involved, you can start with as little as $50.
“Jumping into the stock market without having any prior knowledge is not wise,” eToro managing director Robert Francis told PEDESTRIAN.TV. “Inexperienced investors taking high risks are most likely to lose capital. Watch, learn and practice before investing any money.”
“Investors can practice with a virtual account so you can play around with a mock portfolio without having to risk any real money.”
2. Neglecting investor homework
So you’ve decided to invest in a nifty little startup with a cheap enough share price, but have you done enough research on exactly where you’re putting your money? More importantly, have you identified legitimate reasons to assume those shares to grow in value?
“Some investors don’t spend enough time doing their research on some of the businesses they invest in,” Francis said. “By researching particular sectors and trends, you’ll gain insight into what companies are generating value and those you should steer clear of.”
This doesn’t involve just looking into the company you’re investing in either, you need to keep your finger on the pulse greater market and economic changes, along with global issues that might affect performance. COVID-19 is a pretty good example of this. According to Moneysmart, you should be keeping an eye on the following when investing.
- The Australian economy
- Interest rates
- Government policy
- Exchange rates
- Investor sentiment
- Industry-specific or regional influences
- Relevant overseas economies and markets
If you’re impatient or would rather learn from those already making moves in the market, eToro lets you easily mimic others who are performing well on the platform through the CopyTrader function.
“If you can’t commit to ongoing research, then copying someone else who does, like an eToro popular investor, may be the better route for you. You mirror the positions they open with their own money, so by having skin in the game, you know they are making considered decisions,” Francis said.
3. Going too hard
It should go without saying, but investing what you can’t afford is not a good strategy.
While it’s easy to be motivated by the success stories of people making absurd amounts of money in relatively short time frames, these situations are actually very rare. The fact is, the stock market should be viewed as a long-term investment which is added to gradually.
“The stock market is not a get-rich-quick scheme,” Francis said. “Investors should adopt a long-term investment mindset and only invest what they can afford to lose if markets don’t perform as you had anticipated.”
As you build up knowledge and experience, there may be opportunities for higher risks and returns you’re comfortable taking, but it’s definitely not an area for beginners to play in, especially in the market’s current state.
“High-risk mindsets amongst inexperienced investors may result in losses, especially during the global pandemic when markets have been extremely volatile.”
To sum it all up, do your homework, take your time and don’t get ahead of yourself.Image: The Wolf of Wall Street