The most frequent errors of beginners of trading on equities

8 min read

Most people start trading to make money and improve their economic condition. Nobody is trading to lose their money. However, it often seems that those who lose their investments compared to those who earn money are more. No trader (even the greatest professionals) can win 100% of their operations, however, we can see the main causes of loss to try to avoid them in the future.

1. Do not know what you are buying

The famous investor Peter Lynch announced the concept of buying "what is known". The logic is to buy stocks that you know and understand. Although this does not mean that if you like the Tesla roadster you have to buy Tesla shares, it is still a good starting point for further research.

Remember to always do homework on the actions. Spend some time analyzing the history, identify all the pros and cons of the investment on a given action. Many traders buy shares in sectors they do not know, simply on the advice of market analysts. It is an imprudent strategy that leads to impulsive purchases and sales, since the investor in this case is not able to grasp the long-term perspective of his investment.

2. Do not follow earnings budgets

Warren Buffet, when asked how investors could make smarter investment decisions, he replied by showing piles and stacks of balance sheets and saying "read 500 pages of them every day". This is the way to acquire knowledge, how to acquire the compound interest ".

Warren Edward Buffet is considered by many to be the most successful investor in the world

Many investors ignore the company's latest quarterly financial statements and their latest announcements. As a result, they do not understand why a company satisfies or deludes quarterly estimates, ignoring the challenges and obstacles that could affect the performance of its investment portfolio.

3. Underestimate estimates and evaluations

There are traders who rely on technical analysis and faithfully follow the trend, ignoring the fundamental analysis and the underlying factors, the growth and valuations of corporate activities. In these cases traders violate the basic rules of long-term investment activity, because only fundamental analysis is able to offer an overview of the growth of a company and to determine the value of a security based on its fundamental assessment.

4. Sell the winners and keep the losers

Investors have a natural tendency to sell the winners and keep the losers. This comes from the fear of losing profits and hoping to recover losses.

History shows how disastrous it can be to always sell the winners. If you invested $ 10,000 in the Amazon IPO (NASDAQ: AMZN) in 1997, you would have received 555 shares. Following three subdivisions in 1998 and 1999, your shares would have risen to 6,660. Those shares today would be equal to $ 5.8 million. Imagine how you would feel if you had sold your shares at the first doubling, when their value has tripled or even quadrupled.

As for the losers we can take for example the BlackBerry (NASDAQ: BBRY), which has lost 95% of its market value over the last decade. Those who believed possible a return of the former smartphone manufacturer (in the telephony, tablet or software sector) clashed with multiple disappointments.

The Chinese company TCL has launched a new device with the BlackBerry brand, now devalued, in February

5. Do not diversify

One of the easiest ways to lose money on the stock market is to not diversify. Investing in a single title is certainly positive if it increases, but it creates big problems if it falls instead.

Even buying a large number of shares in a single sector is not to be considered diversified, as negative news on a company often drag other companies in the sector down. So, the best thing is to select a series of titles from various sectors.

6. Want to get rich quickly

The financial sector is crowded with account managers and strategy developers, and everyone swears they have the magic trick that will allow you to reach the top of investment gurus. Some of these can actually help you improve your investment approach, but none of them can promise you wealth, unless you are willing to work hard to earn it.

The vast majority of traders are not aware of their need to familiarize, learn, practice, have constancy and improve their self-awareness. This chart of emotions helps you understand how emotional is important when your money is at risk.

Unlikely expectations and emotional instability can cause serious financial loss

The key principles

Here's what you should keep in mind when trading stocks: learn more about company news and balance sheets, know the company you choose, diversify your trading portfolio, let the winners grow and cut losses. Only in this way will you have the possibility to improve the effectiveness of your trading activity.

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This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.

GENERAL INFORMATION ON RISKS:

CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 76% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.

Source: IQOption blog 2018-11-20 10:54:03