Gaining exposure to the stock market can have an invaluable role when you are planning for a secure financial future. However, newcomers are prone to making a few costly mistakes while getting to grips with trading.
Here are five common pitfalls to avoid.
1. Timing the market
There’s an old saying: time in the market beats timing the market. Constantly chopping and changing your strategy by buying or selling stocks regularly can mean you miss lucrative opportunities.
Take this research from Putnam Investments, which looked at how $10,000 invested in the S&P 500 from 2007 to 2022 would have performed.
Left untouched for 15 years, it would have been worth $35,461 by the end of this period. Not bad. But missing the stock market’s best 10 days slashes this to $16,246. And sitting on the sidelines for the best 20 days would result in a loss of $252.
2. Chasing losses
Investing money in the stock market comes with risk. Because of this, equities don’t come recommended if you may need to access your cash in the short term. By adopting a years-long outlook, you can also benefit from the magic of compound interest.
Day trading (where assets are bought and sold within a single 24-hour period) carries risk because you can end up losing a substantial amount of your capital quite quickly.
And without a strategy in place, emotions can take over — meaning you chase losses and throw good money after bad by making impulsive decisions.
3. Failing to perform research
Picking individual stocks is harder than it looks.
To find companies with the most potential, you need to delve into their valuations, assess their competitors, examine the industry, and consider other factors such as dividends. Your risk appetite should also be taken into account.
This can take months, if not years, to perfect. A compelling alternative can be opening a Stocks and Shares ISA, where any returns you make will be exempt from tax.
Certain investment platforms also offer exchange-traded funds, which track multiple stocks. They could be following certain indices like the FTSE 100 and the S&P 500, or specific sectors like healthcare.
4. Blindly following others
While stock tips from TV personalities and your friends may seem like a tantalising prospect, such opportunities may be rather crowded by that point.
However, some platforms do offer a social element to trading that can allow you to interact with others, and even use their strategies.
eToro offers a CopyTrader tool where you can automatically emulate experienced users in real-time. It’s completely free, saves you time, and there’s also a transparent breakdown of how their tactics have performed in recent years.
5. Lacking diversification
As the old saying goes, you never want all of your eggs in one basket. A blend of stocks, bonds and commodities can ensure that one “black swan” event won’t decimate your portfolio in one fell swoop.
With these common trading mistakes in mind, you can start trading safely through one of our reviewed trading platforms in the UK.
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