Lately, stock trading has become immensely popular. Once reserved for wealthy people with time and an appetite for risk, stock trading has become more accessible through stock trading apps, stock fractions and automated advice.
That’s good – great, actually. I like to see more Canadians passionate about stocks because it is one of the best ways to build substantial long term wealth.
But with more accessibility comes a greater likelihood of making mistakes. Even more with a stock portfolio on your phone. You might be tempted to sell when it’s wiser to hold, for example, or you might pick the wrong stock just because you didn’t spend the time researching the business itself.
If you’re new to stock trading and don’t want to break the bank, here are three common mistakes to avoid.
1. Buy a stock because everyone is
When you are new to investing in stocks, you can look to stocks that other investors have put forward. You might see a stock that climbs dramatically overnight, or you might have heard stories of a stock that has more than doubled in value in a year. And you might be tempted to buy stocks on that knowledge alone.
But, in general, it is not wise to buy stocks just because everyone else is. While, yes, the hype can lead you to a good stock pick, the method by which you got there is flawed.
Instead, you should invest in companies that you understand and believe have long-term value. This means that you have to dig into your stocks whether or not other investors believe it. Use valuation metrics, like a P / E ratio, to deepen the stock price. If your independent research tells you that stock is a good choice, then don’t hesitate to buy stocks.
2. You confuse “trading” with “investing”
âStock tradingâ and âinvestingâ are not interchangeable. Traders and investors want to earn profits from their investments, this is true. But the way they do it is different.
Investors identify stocks that have long-term value and the potential for growth. They buy shares of those stocks and then hold them for the long term. Their goal is to increase their initial investment over five, 10 or even 15 years.
Stock traders, however, enter and exit stock positions daily. They don’t necessarily care about long-term growth. They want to find a title that will perform exceptionally well in the short term. And they want to sell their stocks and make a profit before the stocks go down.
Newbies to the stock market should understand that what they are doing is not investing. It’s trading, and it comes with more risk than investing. As long as you understand the risks of trading stocks and know what you are getting into, I won’t put you off. But if you’d rather see long-term growth rather than short-term gains, you might want to consider changing your strategy.
3. You use the margin to buy stocks
When you open a margin account, you can borrow up to 70% of the value of a stock from your broker (this percentage varies from broker to broker as well as from security to security) . For example, if you wanted to buy $ 1,000 of stocks, you could borrow $ 700 from your broker and contribute $ 300 of your own money.
In theory, this sounds like a good idea: with borrowed money, you can buy more stocks with less money. But in practice, he can easily get lost.
On the one hand, you can lose a lot of money quickly. For example, if you had invested $ 1,000 in a stock and your stock lost 50% of its value, you could sell your stock and come away with $ 500. It’s a loss of $ 500, but it’s not a total loss.
With margin trading, you would have a total loss in this scenario. You would lose your $ 500 investment and have to return the remaining $ 500 to your broker. On top of that, you would also pay interest on top of what you borrowed (much like a loan) as well as a fee. As you can see, it can get expensive.
As a new investor, I would say stay away from margin accounts, at least until you gain more experience. Use your own money to invest, not borrowed money, and you won’t risk losing more money than you can afford.
Our stupid result
If you are new to investing, I suggest you learn different investing strategies, pick one, and then stick with it. While you may be tempted to trade stocks for quick wins, you are probably better off establishing a long-term investment strategy first.