Stock Market Advice

Common Trading Mistakes To Avoid

Not Selling Losing Stocks

For whatever reason, some people hold onto their losing stocks for too long. Failure to get out of declining stock is probably the number one reason why so many investors lose money. A good rule of thumb is the 10 percent rule: if you lose more than 10 percent on an investment, sell. You lost, so sell the stock before you lose even more.

Letting Your Winning Stocks Turn into Losers

Sometimes when you sell a stock for a gain, you are left with a feeling that if you had held it a little longer, you would have made more money. In contrast, some people will make tons of money in the stock market, only to sit back and watch helplessly as their profits disappear (what the market gives, the market takes away). Some are even in denial about the fact that many of their favorites stocks will never return to even. For many, they not only lost their gains but their original investment too. Another good rule of thumb is the 30-30 plan: if your stock rises by more than 30 percent, sell 30 percent of your position. By selling a portion of your gains, you satisfy the emotions of fear and greed. By doing so, you lock in at least a portion of your gains, and you can always reevaluate your portfolio later.

Bottom Fishing

Bottom fishing is trying to catch a stock when it reaches its lowest price. This is often a great way to get soaked and lose a bucketful of money. This often happens in bear markets, when stocks appear cheaper than most of us ever expect or want. Sometimes they won’t stop falling until they’ve run out of gas. There are professional bottom fishers who are constantly on the lookout for stocks that are so low that they have nowhere to go but up. The danger of bottom fishing is that you never know when the bottom has been reached. Case in point – When Enron went from nearly $100 a share to $15, many people bought more shares, thinking the stock couldn’t go much lower. When the stock was trading at $1 a share, the bottom fishers stepped in, buying up the stock. Then the stock fell almost 94% before really hitting bottom, finally closing at 6 cents.

Winging It

Traders get in huge trouble when they wing it. You might have heard someone on business TV say a stock was hot and heading higher, or your friend might have told you they have a hot stock they are investing in. Although this may sound like great information, the easiest ways to lose money in the market is by listening to tips, especially if they come from well-meaning but uninformed friends or relatives. Instead, do your own research, devise a strategy, and execute your plan. Don’t second guess yourself. When in doubt, close the deal. It’s easier to think clearly when your money isn’t at risk. You can always buy back the stock if further analysis proves favorably.

Falling In Love

Consider trading as a business. Your stocks are your inventory. Smart business people do not fall in love with their inventory. It’s there to sell and make a profit. Some people hold onto a stock because of sentimental feelings, like a graduation gift, or because they spend hours doing research and “just know” it will get better. Don’t hold onto a losing stock just because you don’t want to upset your family or because you want to be right. Stocks are meant to be bought and sold to generate profits. If you want something that can be held onto for future growth maybe look into other investment options.

Diversifying Badly

Putting all your eggs in one basket is a bad idea, so is betting all your money on only one or two stocks. And just the opposite is bad also, trading hundreds of stocks simultaneously. Try to choose a happy medium somewhere in between.

Selling All of a Winner

When you make a profit, it’s only natural to want to sell and invest that profit elsewhere. But what if the stock keeps going up after you sell? You may feel regret in selling too soon. It’s okay to make a profit – in fact, that’s the point, isn’t it? Go back to the 30-30 plan, only sell 30 percent, or even 50 percent, and hold on to the rest of the winning stock.

Blindly Following Your Broker

Do you know people who begin every sentence with, “My broker says…”? Well guess what. Brokers are business men and women out to make money. Most of the time their salary is based on commission, meaning they make money each time you make a transaction. Some brokers are known to offer advice, sometimes bad advice, just to get you to trade stocks. Don’t get burned. You can, however, listen to your broker and do your own research. Press for details. Ask why this stock is the next great stock. And, "Did you invest your own money in it?"

Taking It Personally

The market isn’t out to get you – it’s only out to get your money. Don’t let a losing trade get to you. Sure it makes you feel bad, but a losing trade doesn’t smear your honor or disparage your heritage. A bad trade may effect your net worth, but don’t let it damage your self-esteem. Don’t take trading personally; a losing trade is just another losing trade. There will be plenty of them. Get used to it.

Assuming the Stock is Good Because You Like the Product

How often have you and your friends enjoyed a product (like Starbucks coffee) and mentioned that you should own stock in the company? Some people incorrectly assume that a great product equals great stock. But there’s more to a company than a good product. Do your research. Learn everything you can about the company from its management team and its business plan to its stock performance. The more you know, the better your investment strategies can be.

A Little Bit of Advice

Sometimes someone else’s experiences shed light on what we can do better. Here's some advice from those who have been there.

1. Start by paying off all your debts. Don't go farther in debt by buying stocks.
2. After you are debt-free, don't be tempted to blow your money on risky financial venues.
3. It is hard enough for most people to simply earn a living. Ninety-five percent of people are unable to acquire and maintain a fortune. This is not meant to discourage you, but to warn you and give you the courage to fight harder to be one of the top five percent.
4. Always be prepared for the responsibility that you may have to support your parents. In addition, you owe it to your wife and children to buy life insurance.
5. You want the privilege of assisting those who are afflicted and impoverished.
6. The most significant measure of success is integrity, hard work, and being right more than 55 % of the time. This also means diversifying risks so that when you are wrong it won’t break or crimp you.
7. Never cosign promissory notes for someone else.
8. Never try to please your friends by buying stocks in small corporations – easy to buy, hard to sell.
9. Don’t be a pushover in loaning money, except in extreme cases (i.e., don’t let a good friend down).
10. Only hard experience, proven by fact, should impress you and cause you to follow the rules outlined above.