17/04/2024

Ballet Coins

Empowering Your Business Journey

Pitfalls to avoid when trading stocks

Stock trading seems simple – buy low and sell high to make a profit. However, there are many potential pitfalls that investors can easily fall into if they are not careful. In this article, we will explore what some common pitfalls in online trading are, and how traders can avoid making them. It is essential to remember that the stock market is always fluctuating, and stock prices are never predictable. Therefore, while avoiding these pitfalls cannot guarantee success in the markets, it can lead you to make wiser decisions related to your investments.

Relying on tips and rumours

One of the biggest traps for new traders is buying stocks based solely on tips from friends, online forums, or vague rumours without doing thorough research. While a hot tip may seem promising in the moment, there is no guarantee it will pan out as hoped. Tips are rarely backed by solid factual analysis and insight into a company’s financials and industry trends. Always take the time to independently research any investment leads before putting your money on the line.

Only chasing short-term gains

The lure of a quick profit can motivate traders to chase stocks that are rapidly rising, hoping to catch the last part of their move upward. However, these stocks can often end up being in a speculative bubble that is due to pop.

Trying to time short-term market movements is a predictable way to lose money over the long run, as it is impossible to time the market and achieve profits with consistency this way. Have realistic time horizons of at least a year or more for investments to allow fundamentals to drive returns and know that having and sticking to a trading plan is your best bet at finding success in the markets.

Over-diversifying

Beginners sometimes think that owning small pieces of many different companies reduces risk. In reality, an investor just starting out will not have the resources or expertise to properly research more than a handful of quality stocks. Putting $1,000 into 100 different companies results in negligible ownership stakes with very little potential upside, and it may even cause you to lose focus on your investments as you have too many to manage. Focus on truly getting to know the business fundamentals and prospects of 5-10 hand-picked companies to start.

Working with an unregulated broker

Brokers in Singapore must be regulated and authorised by the Monetary Authority of Singapore (MAS). The MAS is the country’s central bank, and it oversees financial regulations, including brokers that execute trades and the Singapore Exchange.

On top of working with a broker that is unregulated making for a pitfall, following a broker’s stock tips without critical independent analysis is risky. This is because while brokers may offer sound financial education and tips, they do not know your portfolio like you do and cannot give you the personalised guidance that you will need. You should never equate reviewing educational resources with getting objective counsel. Investors must take responsibility for conducting their own thorough due diligence on any trades.

Getting emotions involved

Panicking and bailing out of positions at the first sign of losses or failure to rocket upward right away is a sure way to miss out on long-term gains. At the same time, however, being too slow to sell after a stock has reached its peak or hit points of concern means potentially locking in avoidable losses. The appropriate time to sell depends on the dynamics of each individual company and industry. Do your homework and establish logical sell rules and price targets in advance, and you should never jump in and out of markets based on unsound emotions.

Ignoring transaction fees and costs

Trading frequently to chase small moves in and out of stocks adds up quickly in commissions and fees, which may differ from broker to broker. Nonetheless, they nibble away silently at total returns. Keep transaction costs low by spacing out trades, buying in batches periodically, and maintaining a longer-term outlook. Only execute trades that are large enough in dollar terms to offset trading expenses meaningfully, and you should always keep track of the costs that you pay and deduct them from your total returns.

Failing to manage risk

Finally, while the potential rewards of stocks are enticing, the risks must not be ignored or underestimated. Use appropriate risk management strategies like stopping losses to cut positions that go dramatically wrong. Determining what percentage of a portfolio to dedicate to any one holding based on its risk characteristics also helps control overall risk. Monitor positions regularly and rebalance allocations as needed, and you should always be aware of your risk profile and understand what you can or cannot afford to lose.

Final words

When stock trading, it is easy to get caught up in different promises and the opportunities that come up. Traders should always pay attention to where things can go wrong – as profits are never guaranteed in trading and more often than not, individuals lose money. Common pitfalls like impulse buys, over-trading, relying on tips, and failing to manage risk must be overcome for long-term stock trading success. With patience and discipline, investors can increase their chances of profit by doing thorough research and letting fundamental analysis guide well-planned investment decisions.